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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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COMMISSION FILE NUMBER: 0-12185
ALASKA APOLLO RESOURCES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PROVINCE OF BRITISH COLUMBIA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
131 PROSPEROUS PLACE, SUITE 17-A 40509-1844
LEXINGTON, KENTUCKY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (606) 263-3948
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, no par
value per share.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/. NO .
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE: None.
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TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Oil and Gas Exploration and Production. . . . . . . . . . . . . 1
Mining Operations . . . . . . . . . . . . . . . . . . . . . . . 6
The Mining Claims . . . . . . . . . . . . . . . . . . . . . . . 8
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Executive Officers of the Registrant. . . . . . . . . . . . . .11
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .12
Item 4. Other Events. . . . . . . . . . . . . . . . . . . . . . . . . .12
Item 5. Submission of Matters to a Vote of Security Holders . . . . . .12
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Item 6. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . .13
Foreign Laws Affecting the Common Stock . . . . . . . . . . . .13
Item 7. Selected Financial Data . . . . . . . . . . . . . . . . . . . .14
Item 8. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . .14
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Capital Resources . . . . . . . . . . . . . . . . . . . . . . .16
Results of Operations . . . . . . . . . . . . . . . . . . . . .17
Item 9. Financial Statements and Supplementary Data . . . . . . . . . .18
Item 10. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . .18
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Item 11. Directors and Officers of the Registrant. . . . . . . . . . . .19
Item 12. Executive Compensation. . . . . . . . . . . . . . . . . . . . .20
Compensation of Directors . . . . . . . . . . . . . . . . . . .21
Compensation Committee Interlocks and Insider Participation . .21
Item 13. Security Ownership of Certain Beneficial Owners and Management.22
Item 14. Certain Relationships and Related Transactions. . . . . . . . .23
Indebtedness of Directors, Officers and Employees . . . . . . .23
Lease Obligation of the Company . . . . . . . . . . . . . . . .23
Arizona Desert Minerals Co., Inc. . . . . . . . . . . . . . . .23
CFO Services, Inc.. . . . . . . . . . . . . . . . . . . . . . .24
Guthrie York & Company, Inc.. . . . . . . . . . . . . . . . . .24
Indebtedness of the Company to a Shareholder. . . . . . . . . .25
Lease Obligation of the Company . . . . . . . . . . . . . . . .25
Arizona Desert Minerals Co., Inc. . . . . . . . . . . . . . . .25
CFO Services, Inc.. . . . . . . . . . . . . . . . . . . . . . .26
Guthrie York & Company, Inc.. . . . . . . . . . . . . . . . . .26
Indebtedness of the Company to a Shareholder. . . . . . . . . .26
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
i
PART I
ITEM 1. BUSINESS
GENERAL
Alaska Apollo Resources Inc., (the "Company" or the "Registrant") is a
diversified natural resources company that is engaged through certain
subsidiaries in the exploration and production of oil and gas in the State of
Kentucky, and in the prospecting, acquiring and, if warranted, developing gold
mining properties in the State of Alaska. As used herein, the terms the
"Company" and the "Registrant" refer to the Company and its wholly owned
subsidiaries, unless the context otherwise requires.
For financial information regarding the segments of the Company's
operations, see the information contained in the Consolidated Financial
Statements incorporated by reference in Item 8 hereof. To date, the Company's
revenues are derived primarily from its oil and gas activities. The Company has
received no revenues from its mining properties.
The Company was incorporated on February 9, 1979, under the laws of British
Columbia, Canada, as Catalina Energy & Resources Ltd. On November 27, 1981, the
Company's name was changed to Alaska Apollo Gold Mines Ltd., and the authorized
capital stock of the Company was changed from 5,000,000 shares of the Common
Stock to 20,000,000 shares of the Common Stock. On October 14, 1992, the
Company's name was changed to Alaska Apollo Resources Inc., and the Company
completed a share recapitalization pursuant to which the Company's authorized
capital was consolidated from 20,000,000 shares of the Common Stock to 6,000,000
shares of the Common Stock. On September 9, 1993, the Company's authorized
capital stock was changed from 6,000,000 shares of the Common Stock to
20,000,000 shares of the Common Stock. At the date of this Report, there were
7,742,710 shares of the Common Stock outstanding.
On September 17, 1993, the Company acquired all of the issued and
outstanding shares of Daugherty Petroleum, Inc., a Kentucky corporation
("Daugherty Petroleum"), in exchange for 1,250,000 shares of the restricted
Common Stock of the Company. Daugherty Petroleum is engaged in the exploration,
production and development of natural gas, and, to a lesser extent, oil. All of
Daugherty Petroleum's operations are presently located in Kentucky.
On December 31, 1993, the Company's wholly-owned subsidiary, Alaska Apollo
Gold Mines, Limited, a Nevada corporation, was merged into Daugherty Petroleum.
As a result of the merger, all of the Company's mining properties and related
assets were transferred to Daugherty Petroleum. On March 28, 1994, the Company
acquired through a newly formed wholly-owned subsidiary of Daugherty Petroleum,
Niagara Oil, Inc., a Kentucky corporation, approximately 60 percent of the
working interests in a group of leases and 154 oil wells located in Henderson
County, Kentucky, commonly referred to as the "Niagara Field." Consequently, as
of the date of this Report, the Company has one subsidiary, Daugherty Petroleum,
Inc. Daugherty Petroleum has one subsidiary, Niagara Oil, Inc.
OIL AND GAS EXPLORATION AND PRODUCTION
The Company is engaged through Daugherty Petroleum, which was incorporated
in 1984, in the business of acquiring properties for the exploration and
development of oil and gas, including lease acquisitions, participation in
ventures involving other oil and gas companies and investors, and in farm-ins
from other producers. Daugherty Petroleum performs these services on behalf of
the Company, investors in specific programs, and on a turnkey basis for other
oil and gas companies. Daugherty Petroleum has also acquired producing
properties, both to operate and to resell. These acquisitions often require
workover attempts and the purchase of these properties is usually based upon an
assumed return on investment to the Company of three years or less. During
1995, Daugherty Petroleum did not acquire any oil or gas wells by direct
purchase. During 1995, the Company acquired mineral leases in its area of
operation, expanded its reserve base through the drilling of 16 wells, and
participated in four additional wells drilled by another operator on Daugherty
Petroleum farmout acreage. The Company also pursued acquisitions of reserve,
mineral lease, and well assets but did not close any acquisitions during 1995.
In addition to its main business of drilling and operating oil and gas
wells, Daugherty Petroleum is pursuing a strategy of diversification within the
oil and gas industry. The Company has developed a infrastructure to allow it to
serve other segments of the industry, such as transportation, marketing and
pipeline construction and operation. During 1995, the Upper Cumberland Utility
District, a non-profit "public utility" completed the construction of an 18-
mile, eight inch pipeline
1
connecting its system with the East Tennessee pipeline. Pursuant to the terms
of an agreement with Upper Cumberland Utility District, Daugherty Petroleum has
the option to purchase all transportation space available on the District's
system in excess of that quantity required by the District to supply its
customers. The term of the agreement is for five years and is renewable in five
year periods.
Daugherty Petroleum, Inc., completed the construction of a natural gas
pipeline gathering system, approximately 40,000 feet in length, in the Gausdale
Field located in Knox County, Kentucky. This system, in which the Company owns
a 25 percent interest, has allowed Daugherty Petroleum, Inc., to extend its
operations and will allow further exploration into areas previously inaccessible
to pipeline gathering systems.
Daugherty Petroleum is mainly active in oil and gas exploration,
development and production in the Appalachian and Illinois Basins. The western
edge of the Appalachian Basin in eastern and southeastern Kentucky is the
primary target for drilling and acquisitions by the Company. The Appalachian
Basin, which has relatively shallow production, is the oldest and,
geographically, one of the largest producing regions in the United States. In
the Appalachian Basin, Daugherty Petroleum operates gas wells in the
Williamsburg and Gausdale Fields in Whitley and Knox Counties, Kentucky. The
wells range between 1,500 and 3,000 feet in depth and production is from the Big
Lime, Waverly, and Devonian Shale Formations, with daily production ranging
between 20 and 200 Mcf per day. The gas produced in the fields is of a good
quality and dry. The proximity of the gas fields to the northeastern United
States market has generally resulted in higher than average natural gas prices.
The majority of Daugherty Petroleum's oil is produced from leases located
in the western Kentucky portion of the Illinois Basin. The wells in which
Daugherty Petroleum owns interests are less than 2,500 feet deep, and each well
typically produces one to five barrels daily. Daugherty Petroleum acquired most
of its oil production through acquisitions. Most fields in the Illinois Basin
are eventually produced by waterflooding (secondary recovery methods), and it is
the intention of the Company to waterflood some of its properties that have the
characteristics to flood well. In addition to waterflooding to enhance
production, the Company intends to drill on proven undeveloped leases that the
Company owns.
The Company is continually leasing land for future drilling operations.
The document normally used to lease land is commonly referred to as "Oil and Gas
Lease-Kentucky-Tennessee Form 88." This lease document allows the Company the
exclusive right of extracting oil and gas by drilling, injecting gas, water,
brine and other substances relating to the production of oil and gas into
subsurface strata, and rights-of-way for laying gathering lines and constructing
structures required for the production of oil and gas. The royalty to the
mineral owner is typically one-eighth of the gross sales price, and the owner
usually receives free domestic gas. The typical lease taken by the Company is
for a term of one year. If production is obtained within the term, the lease
remains in force and effect so long as production continues, otherwise, the
lease expires.
The Company's operating objective is to continue to build and maintain a
dominant position as an oil and gas producer in the Appalachian and Illinois
Basins. To accomplish this objective, first, the Company intends to continue an
aggressive growth strategy. Many producing properties are expected to become
available for sale in the areas in and around the Company's existing operations.
Next, the Company intends to expand its lease inventory and continue seeking
capital to finance new drilling operations. The Company has typically acquired
drilling capital by offering joint venture interests in drilling prospects to
sophisticated and accredited investors, and by offering turnkey drilling
services to other oil and gas companies, thereby earning interests of between
five and 25 percent in each well drilled. Finally, the Company plans to
continue the improvement of profit margins on oil and gas production through
operating efficiencies, mechanical improvements, and the use of enhanced and
secondary recovery techniques.
Daugherty Petroleum owns a net 10.4 Bcf or its equivalent of proven natural
gas reserves. The Company's natural gas reserves increased 25 percent in 1995,
and this increase was solely attributable to the drilling of wells through joint
ventures and partnerships. The Company purchased no gas reserves in 1995. For
information relating to Daugherty Petroleum's proven reserves and proven
undeveloped reserves, see the Consolidated Financial Statements incorporated by
reference in Item 8 hereof.
DOMINION RESERVES, INC. On June 16, 1995, Daugherty Petroleum signed a
joint venture agreement with Dominion Reserves, Inc., to drill 15 wells in Knox
County, Kentucky. The agreement also gave Dominion Reserves, Inc., a first
option
2
to drill additional wells in an area of mutual interest with the Company. Nine
of the 15 wells were drilled in 1995, with the remainder to be drilled in 1996.
LOS ALAMOS NATIONAL LABORATORY AND UNIVERSITY OF HOUSTON'S OIL RECOVERY
CENTER RESEARCH PROJECT. On March 15, 1995, research related to the Company's
research project on the Summit Funding properties were discontinued by Los
Alamos and the University of Houston as a result of insufficient data to conduct
a reservoir simulation study. On September 5, 1995, the Company signed a
Cooperative Research and Development Contract ("CRADA") with Los Alamos National
Laboratory and the Regents of the University of California. The scope of the
new contract is to "investigate the design of a development drilling program for
gas fields." The Company is currently transmitting data on field geology and
well production to the Los Alamos Laboratory for digitization. After all the
information is obtained and digitized, analysis will be performed to study areas
for potential development and assist the Company in selecting drilling locations
for greater enhancement of natural gas reserves.
WENTZLOFF ACQUISITION. During 1994, Daugherty Petroleum purchased 6.5 Bcf
of natural gas or its equivalent from 29 Kentucky partnerships for 1,057,795
shares of restricted common stock in the Company. During 1995, the Company
produced 189,916 Mcf (0.189 Bcf) of the 6.5 Bcf of natural gas.
The shares of the restricted Common Stock which were attributable to the
acreage and overriding royalty interests and personal property acquired from
Wentzloff Energy and Southern Drilling were placed in trust pursuant to trust
agreements and escrow agreements executed by Wentzloff Energy, Southern
Drilling, Daugherty Petroleum and a trustee. All stock placed in the trusts was
subject to proxies whereby such stock was to be voted in accordance with the
direction of the management of the Company. The voting trust agreements expired
on November 16, 1995.
Likewise, the shares of the restricted Common Stock which were received by
the partnerships for the gas production sold to Daugherty Petroleum were placed
in trust pursuant to a trust agreement executed by the partnerships, Daugherty
Petroleum and a trustee. All stock placed in the trust was subject to a proxy
and a voting trust agreement whereby such stock is to be voted in accordance
with the direction of the management of the Company. The voting trust agreement
expired on December 22, 1995.
Under the terms of the purchase agreement with Wentzloff Energy, Daugherty
Petroleum had a period of 12 months to conduct due diligence with respect to the
production purchased from the partnerships. As of November 16, 1994, the
Company determined to its satisfaction that the reserves covered under the
purchase agreement were in place and on that date and notified the trustee of
this satisfactory completion of its due diligence. Subsequent to this
notification the shares held by the trustee for the various partnerships were
distributed to the various partnerships. On November 15, 1994, Wentzloff Energy
directed the trustee to distribute the shares to the individual partnership
participants. As of the date of this Report, these shares have been issued to
the various participants and, as of December 22, 1995, the shares are free
trading subject to the ongoing restrictions of Rule 144 of the Securities Act of
1933.
Daugherty Petroleum bears all costs and expenses relative to the production
of gas purchased from the partnerships. In addition, Daugherty Petroleum and
the partnerships have entered into a Joint Development Agreement, in order to
enhance the recovery from the oil and gas properties owned by the partnerships.
All production of oil and gas from the properties owned by the partnerships
shall be allocated to Daugherty Petroleum until the receipt by Daugherty
Petroleum of the 6.5 Bcf of gas purchased from the partnerships. Thereafter,
any recovery shall be split 80 percent to Daugherty Petroleum and 20 percent to
the partnerships.
On April 11, 1994, the Company reached an agreement with Michigan Southern
Energy, Inc., a Michigan corporation, to purchase gas reserves and its
equivalent totaling 0.6 billion cubic feet (0.6 Bcf) from two partnerships which
it managed. The gas is underlying six producing wells located in the Gausdale
Field in Knox County, Kentucky, which are pursuant to the agreement operated by
Daugherty Petroleum, Inc. The consideration for the purchase of 175,002 shares
of the restricted Common Stock.
NIAGARA OIL, INC. The Company's subsidiary, Daugherty Petroleum, through
its subsidiary, Niagara Oil, Inc., acquired from the U.S. Bankruptcy Court for
the Western District of Kentucky, the Niagara Oil Field located in Henderson
County, Kentucky. One hundred fifty-four wells were acquired, and 79 wells are
equipped. Fifteen wells have been used as water injection wells and 60 wells
are drilled but not equipped. The prior operator of this field was in
bankruptcy and
3
had been cited for environmental violations by the United States Environmental
Protection Agency and the Kentucky Division of Water. Daugherty Petroleum
negotiated with the EPA, the Kentucky Division of Oil and Gas, and the Kentucky
Division of Water to clean up the field and to bring it into environmental
compliance. As of the date of this Report, the Company has completed cleanup
operations, has reworked approximately 10 percent of the oil wells and is
proceeding to bring the field into compliance. The Company estimates oil
production will be 75 barrels of oil per day.
PRODUCTION AND SALES. During 1995, 88 percent of the Company's operating
revenues were derived from its oil and gas related activities. The Company's
oil and gas gross revenues totaled $1,820,430 and were comprised of turnkey
contract revenues of $1,280,115 (70 percent); oil and gas production revenues of
$484,237 (27 percent); operating revenues of $41,078 (two percent); and lease
sales of $15,000 (one percent). The Company sells a substantial amount of its
gas through short term (less than one year) gas sales contracts. Gas sales are
dependent on a variety of factors beyond the control of the Company, including
competition with other gas suppliers, seasonal demand for gas and access to gas
markets through transportation systems owned by third parties. During the past
several years there has been a worldwide surplus of oil that is placing downward
pressure on prices. There is no expectation that the oversupply will abate in
the foreseeable future.
PRODUCTIVE WELLS AND ACREAGE. Daugherty Petroleum owns fractional working
interests (cost bearing interests) in 112 gross (42 net) producing gas wells and
in 66 gross (21.6 net) producing oil wells. The majority of Daugherty
Petroleum's gas production is located in southeastern Kentucky, in the Gausdale
Field, in Whitley and Knox Counties. Oil production is primarily centered in
Henderson County, Kentucky in the Illinois Basin, which is located in the
Western part of Kentucky.
A "gross well" is a well in which the Company owns a working interest. A
"net well" is deemed to exist when the sum of the fractional working interests
owned by the Company in gross wells equals one.
As of December 31, 1995, Daugherty Petroleum owned natural gas and oil
mineral leases covering 23,700 gross (19,552 net) acres of land. In 1995,
Daugherty Petroleum had a budget of $100,000 for drilling exploratory wells, and
$500,000 for drilling developmental wells.
A "gross acre" is an acre in which a working interest is owned. The number
of gross acres represents the sum of acres in which a working interest is owned.
A "net acre" is deemed to exist when the sum of the fractional working interests
in gross acres equals one. The number of net acres is the sum of the fractional
working interests in gross acres expressed in whole numbers or fractions
thereof.
DRILLING ACTIVITY. During 1995, Daugherty Petroleum, participated in the
drilling of 16 gross (1.72 net) gas wells. All sixteen of these wells were
completed as wells capable of producing gas in commercial quantities. In
addition, one of these gas wells was also completed as a well capable of
producing crude oil. These wells included wells in which Daugherty Petroleum
participated as program manager of natural gas and oil drilling programs in
which units of participation representing working interest (cost bearing)
ownership were sold to natural gas and oil investors. Daugherty Petroleum
received, as a part of its compensation, interests in the wells operated by it
on behalf of these programs. During 1995, Daugherty Petroleum sold interests in
one drilling program and in one joint venture. The program and the joint
venture were completed and all wells were capable of producing natural gas.
Daugherty Petroleum also participated in a joint venture with Dominion Reserves,
Inc. This joint venture was originally signed for 15 wells. As of December 13,
1995, nine wells had been drilled. The remainder of the wells are scheduled to
be drilled beginning in June 1996.
4
NATURAL GAS AND OIL RESERVES. The following table sets forth information
as to the Company's proved and proved developed reserves of natural gas and oil
and of December 31, 1995, 1994, 1993, 1992, and 1991:
Gas Liquids
TOTAL PROVED RESERVES AS OF: (Mcf) (Bbl)
- - ------------------- --- ---
December 31, 1995 . . . . . . . . . . . . . . . . 10,353,988 201,491
December 31, 1994 . . . . . . . . . . . . . . . . 7,844,657 130,912
December 31, 1993 . . . . . . . . . . . . . . . . 970,753 171,388
December 31, 1992 . . . . . . . . . . . . . . . . 1,250,532 505
December 31, 1991 (1) . . . . . . . . . . . . . . N/A N/A
- - -------------------
(1) Daugherty Petroleum did not have reserves information until 1992.
As used herein, the term "Mcf" means thousand cubic feet, the term "MMcf"
means million cubic feet, the term "Bcf" means billion cubic feet, and the term
"Bbl" means barrel. Liquids include crude oil, condensate and natural gas
liquids.
The reserve estimates presented herein were prepared by management and
reviewed by Richard M. Russell & Associates, Inc., independent petroleum
engineers. The report was prepared March 8, 1996, for the period ending
December 31, 1995. For additional information regarding the Company's proved
reserves, see Note 3 of the Notes to the Consolidated Financial Statements. No
estimates of the Company's proved net oil and gas reserves have been filed with
or included in reports to any federal authority or agency.
CERTAIN FACTORS AFFECTING RESERVES. There are numerous uncertainties
inherent in estimating quantities of proved reserves, including many factors
beyond the control of the producer. The reserve data set forth herein
represents only estimates. Reserve engineering is a subjective process of
estimating underground accumulations of crude oil and natural gas that cannot be
measured in an exact manner, and the accuracy of any reserve estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. As a result, estimates of different engineers
often vary. In addition, results of drilling, testing and production subsequent
to the date of an estimate may justify revision of such estimate. Accordingly,
reserve estimates are often different from the quantities of crude oil and
natural gas that are ultimately recovered. The meaningfulness of such estimates
is highly dependent upon the accuracy of the assumptions upon which they were
based.
MARKETING. The revenues generated by the Company's exploration and
production operations are highly dependent upon the prices of, and demand for,
natural gas, and to a lesser extent, crude oil. For the last several years,
prices of natural gas and crude oil have reflected a worldwide surplus of supply
over demand. From time to time the Company has curtailed its production in
response to low prices. While short term prices for natural gas was low during
most of 1995, the Company saw higher prices for its natural gas beginning in
December of 1995. It is management's belief that market factors will lead to a
strong gas price for all of 1996. Management believes that demand will be
strong for natural gas due to unseasonably low quantities of natural gas in
storage resulting from the harsh winter of 1995, the continuing demand caused by
the increased use of natural gas as an alternative fuel source for motor
vehicles, and the increased use of natural gas as a source for electrical
generation. The Company's efforts to complete its gathering system has improved
its access to new markets where prices more closely reflect the Appalachian hub
prices received by other operators in the Appalachian Basin.
Market conditions for oil and gas are the result of a number of factors
outside the control of the Company, including changing economic conditions,
seasonal weather conditions, loss of markets to alternative fuels, increased
foreign production, governmental regulation and the failure or success of
members of OPEC to agree to and maintain price and production controls.
Historically, demand for, and prices of, natural gas are seasonal, generally
peaking in the winter when heating requirements are highest.
Approximately 67 percent of the Company's natural gas production is sold to
Southern Gas Company with the remaining 33 percent being sold to various
customers including Wiser Oil and Delta Natural Gas. The Company has
significantly increased its gas sales to Wiser Oil through its newly completed
gathering system. Exploration efforts will be concentrated in the area of the
Company's new gathering system so that it can continue to increase its
percentage of gas sold to diversified markets to capitalize on improved prices
and improve its cash flow. The Company sells approximately 60
5
percent of its crude oil production to Indiana Farm Bureau, Inc., with the
balance being sold to refineries such as Marathon Oil, South Kentucky Purchasing
and Bear Creek Oil. The Company believes that the loss of any purchaser of the
Company's oil production would not have a materially adverse affect on the
Company.
COMPETITION. The Company faces significant competition in its natural gas
and oil operations. The Company's competitors in its producing efforts include
major natural gas and oil production companies and numerous independent natural
gas and oil companies, individuals and drilling and income programs. The
Company's competitors in its marketing efforts include other natural gas and oil
companies, major interstate pipelines and their marketing affiliates, and
national and local gas gatherers, brokers, marketers and distributors of varying
sizes, financial resources and experience. The Company has been diligently
working with one of the major natural gas and oil production companies in the
Appalachian Basin over the past year to acquire access to acreage offsetting the
Company's gathering system and existing acreage to decrease competition and
secure a greater leasehold position in its main area of interest. While these
negotiations are continuing, the Company believes its expertise in the area
coupled with its existing leasehold position, working knowledge of the area, and
existing gathering system provide it with a competitive advantage in its market
area.
GOVERNMENT REGULATIONS. The Company's oil and gas operations are subject
to extensive state and federal regulations which have increased the cost of
doing business by requiring additional equipment or methods to eliminate or
reduce pollution and have increased financial exposure as in the case of federal
laws and regulations which may result in absolute liability for cleanup or
removal of contamination. Consequently, governmental agencies may from time to
time suspend or curtail operations considered to be detrimental to the ecology
or which may jeopardize public safety. The Company does not anticipate any
material adverse effect on its financial or competitive position as a result of
compliance with such laws and regulations.
MINING OPERATIONS
The Company's mining properties are located on the southeastern end of Unga
Island in the Shumagin Islands group of the Aleutian Islands, approximately 579
miles southwest of Anchorage, Alaska. The mining properties cover over 381
acres, and are situated on 15 federal patented lode claims and one federal
patented millsite claim (the "Apollo-Sitka Claims," which consist of
approximately 280 acres) and six State of Alaska mining claims (the "Shumagin
Claims," which consist of approximately 101 acres). A three mile road connects
the two claim groups. The Company acquired its interest in the mining
properties pursuant to a lease agreement and option to purchase dated October 9,
1979, with Azel L. Crandall. The lease agreement and option to purchase was
converted into a contract of sale on July 8, 1986, whereby Mr. Crandall and the
Company agreed that the Company would purchase the mining properties from Mr.
Crandall for $854,818, with $50,000 to be paid in 1987, $24,000 to be paid in
each of 1988, 1989 and 1990. Commencing on May 1, 1990, the Company became
obligated to pay to Mr. Crandall the sum of $2,000 per month until the aggregate
amounts received by Mr. Crandall, including any royalty payments, equal the
amount of the purchase price. No interest is due or payable on this obligation.
At December 31, 1995, the amount owing to Mr. Crandall was $594,818. Under the
purchase agreement with Mr. Crandall, the Company agreed to pay Mr. Crandall
four percent of the net smelter returns or net revenues received by the Company
on all minerals, ores, metals or valuable products of any kind mined, extracted
or taken from the mining properties, with any payments credited to the $854,818
purchase price. After the purchase price has been paid, the net smelter return
royalty due to Mr. Crandall will terminate. "Net smelter returns" are defined
in the purchase agreement with Mr. Crandall as the amount received by the
Company from the smelter for any and all ores, concentrates, metals or valuable
products shipped to the smelter, after deducting normal smelting charges and
freight charges, and "net revenues" are defined as the amount paid by any
purchaser to the Company for the sale of concentrates, ores, metals or other
valuable products shipped, taken or produced from the claims, less any marketing
costs and the costs of shipping the products from the mining properties.
In addition to the payments due Mr. Crandall, the six State of Alaska
claims (the Shumagin claims) are subject to annual rental payments of $40 per
claim through 1998. This amount increases to $100 per claim in 1999. The
annual claim rental is subject to revision each 10 years, based on the
Anchorage, Alaska consumer price index. Annual assessment work of $100 per
claim must be performed on the claims and recorded annually. If more than the
required $100 worth of work for each location is performed in any one year, the
excess value may be carried forward and applied against labor requirements in
the subsequent year or years for as many as four years. A $100 cash payment per
claim can be made in lieu of assessment work for one labor year at a time.
6
The Shumagin claims are subject to a three percent of net income production
royalty payable to the State of Alaska. The annual claim rental payment for
each year is credited against the production royalty as it accrues for that
year.
On January 18, 1996, the State of Alaska announced a new Exploration
Incentive Program under the law HB 197. This law added Chapter 30, EXPLORATION
INCENTIVE CREDITS to Title 27 of the Alaska Statutes (AS). AS 27.30 allows
deduction of annually cumulative, specific exploration expenses from the State
Mining License Tax, State Production Royalty, and the State Corporate Income
Tax. The Exploration Incentive Credit can be applied to 50 percent of the State
Taxes in a given year for 15 years (years not necessarily sequential).
Exploration expenditures which may be incurred on the Company's Unga Island
Mining Claims in 1996 and during succeeding years would be eligible for the
credit. Accumulation of exploration expenditures would cease at the time all
permits for a production operation were obtained.
The Company has a Lease dated August 16, 1990, from the Unga Corporation
for the surface rights on approximately 20 square miles covering 23 sections of
land surrounding the Company's mining property. The lease extends through
August 1, 1997, and would continue thereafter so long as the Company conducts
mining operations on the leased premises. The Company must notify the Unga
Corporation on or before January 1, 1997, of its intention to extend the Lease.
Six months after the Company terminates all mining activity on the leased
premises, the Lease would automatically expire. There are no Lease payments,
but the Unga Corporation would receive one percent of all net profits with
respect to all new production and two percent of all net profits with respect to
production derived from mine dumps and tailings in existence prior to execution
of the Lease. The Lease provides water rights, the rights to construct roads,
docks, utility lines, an airstrip, living quarters, and the right to conduct
mining and milling operations on the leasehold.
Franklin Mining & Exploration Company, Inc., and Alaska Apollo Gold Mines
Ltd. signed a joint venture option agreement on February 15, 1990 to place the
Shumagin ore deposit into production at a 200 ton per day rate. Franklin was to
have earned a 60 percent equity interest in the joint venture at the time
production commenced. Franklin became unable to proceed with the joint venture
late in 1990. The joint venture was terminated March 8, 1991. The Company
obtained the Unga Corporation Lease through assignment from Franklin on May 20,
1991.
On October 9, 1991, the Unga Corporation notified the Company that it was
the Unga's position that the surface lease had expired under an implied "use it
or lose it" provision. Unga Corporation maintained that the Company's planned
mining project did not go into operation. The Unga Corporation was represented
in the 1991 letter as being willing to enter into a new agreement under terms
acceptable to all parties.
The Company believes that the August 16, 1990, Lease may be enforceable.
Nonetheless, in view of the current Agreement's August 1, 1997, expiration date,
potential revision to the Lease "footprint" in order to cover an expanded
exploration area, and desirable clause modifications, renegotiation of the
Surface Lease may best serve the interests of the Company and the Unga
Corporation.
The Aleutians East Borough (the "AEB") made application to the State of
Alaska for surface rights on the Company's Shumagin State Mining Claims under
the State Municipal Entitlements Act of 1989. The stated purpose of AEB's
selection was to obtain a land base which could support economic development.
The Company was notified of this selection and the state's proposed conveyance
of the surface land on December 1, 1994. The Company filed comments with the
state. The Company simultaneously notified the Alaska Department of Natural
Resources, Division of Mining, of its intention to file an application to
convert the State Mining Claims to a State Upland Mining Lease. The latter
application was subsequently submitted.
A Final Finding and Decision on AEB's application, issued January 18, 1996,
contained a provision making the application subject to valid existing rights,
easements, and reservations, including the Company's Mining Claims. The grant
Decision became final after expiration of an appeal period February 7, 1996.
The Company retains the right to enter the land for drilling, developing, and
otherwise operating its mineral holding. No adverse impact on the Company's
Shumagin Project or other exploration, development and mining activities on Unga
Island is anticipated as a result of the Shumagin Claim surface rights transfer
to AEB. The Company's application for conversion of its State Mining Claims to
a State Upland Mining Lease is pending.
Beginning in 1994, and continuing through 1995, the Company aggressively
pursued the development of its mining properties and expanded its activities
from those of simple maintenance of the physical property to preparing for its
future development. In 1995, an update of the engineering data was completed to
address reserve estimates as well as to review
7
operational considerations and issues were addressed in a number of meetings
held in Anchorage, Alaska. Also during 1995, the Company expended $61,106 in
performing this work, in addition to the $24,000 paid to Mr. Crandall.
CERTAIN FACTORS AFFECTING RESERVES AND THE INDICATED RESOURCE. The
Company's Unga Island activities on the Apollo-Sitka and Shumagin Claims have
brought the project to the mid-exploration stage. The reserves and indicated
resource are estimates based on surface and underground sampling, drilling, and
geologic inference. Complete assurance cannot be given that all of the reserve
and indicated resource is recoverable. Metal price fluctuations, variations in
production costs and mine/mill recoveries, environmental considerations, the
results of exploration work and geologic interpretation, and other factors may
require restatement of the reserves and indicated resource. Neither the
reserves, indicated resource, nor projections of future operations should be
interpreted as assurances of the economic life or profitability of future
operations.
GOLD PRICE VOLATILITY. The Company's anticipated profitability with
respect to potential production mining activities, which could be initiated
after completion of further exploration work, would be significantly affected by
variations in the market price of gold. Gold prices can fluctuate widely and
are affected by factors such as inflation, interest rates, currency exchange
rates, central bank sales, forward selling by producers, supply and demand,
global or regional political and economic crises and production costs in major
gold producing regions such as South Africa and the former Soviet Union. The
aggregate effect of these factors, all of which are beyond the Company's
control, is impossible for the Management to predict.
The volatility of gold prices is illustrated by the following table of the
high, low and average afternoon fixing prices of gold per ounce in United States
Dollars on the London Bullion Market:
Year Ended December 31,
1995 1994 1993 1992 1991
-------------------------------------------------
High . . . . . . . . . . . . 396 396 409 359 403
Low . . . . . . . . . . . . . 372 371 326 330 344
Average . . . . . . . . . . 384 384 360 344 362
FACTORS IN BRINGING A MINERAL PROJECT INTO PRODUCTION. The Company's
decisions as to whether the mining properties contain mineable ore deposits and
whether any property should be placed in production will depend on the results
of phased exploration programs and feasibility studies, the recommendations of
management and technical support, and the willingness and capability of the
Company's co-venturers or other participants to proceed. This decision will
involve consideration and evaluation of several significant factors, including,
but not limited to (1) costs of bringing a property into production, including
exploration, preparation of feasibility studies, development work, and the
construction of exploration, development, and production mine/mill facilities;
(2) availability and costs of financing; (3) production costs; (4) metal market
prices; (5) compliance requirements for environmental and mine safety and health
regulations; and (6) political climate and governmental regulations.
Exploration and development of the properties may be expensive and take a number
of years. There is no assurance that the Company, its co-venturers, or other
participants will have the necessary funds for any of these activities.
THE MINING CLAIMS
THE APOLLO-SITKA CLAIMS AND MILLSITE. Development of the Apollo-Sitka
Claims started in 1887. The Claims were in production from 1891 through 1904.
During this period, 500,000 tons of ore were extracted with a recovery of
approximately 145,138 equivalent ounces of gold (0.29 ounces of equivalent gold
per ton). Approximately 17,000 feet of underground working were driven during
the mining of and search for oxide gold ore. A 60 stamp mill, located on the
Property, recovered approximately 75 to 80 percent of the gold contained in the
oxide ore. Low recoveries of the lead, zinc, and copper sulfides contained in
the ore were made. Mining operations were shut down in 1904 after the free-
milling oxide reserve was depleted and exploratory work discovered only precious
metal-bearing copper-lead-zinc sulfide ores, which were uneconomic to process
with mill technology available at the time. The development of the flotation
mineral recovery process and improvements in that process over the years may
possibly have rendered the current Apollo-Sitka reserve and resource economic at
current metal prices.
8
The main Apollo Mine was developed over a vertical interval of 1,400 feet
and 3,000 feet along strike. The principal workings consist of an upper tunnel,
a lower tunnel, a 420 foot internal shaft, and an 811 foot exploration shaft
located approximately 1,000 feet east of the lower tunnel portal. Extensive
exploration workings were driven on Levels off both shafts. Over 1980 through
1982, the Company surveyed and mapped the upper and lower tunnels. The internal
shaft was dewatered to the lower (400) Level and rehabilitation work was started
on the three Levels accessed by that shaft. The collar area of the exploration
shaft was rehabilitated.
The 350-foot deep Sitka shaft is located approximately 1,580 feet northeast
of the Apollo exploration shaft. The Sitka mine was developed by the shaft and
three levels. These workings were rehabilitated, sampled, and mapped by the
Company over years 1980-1982. This work and associated surface and underground
diamond drilling are the basis of the current Sitka Reserve.
The Apollo-Sitka Claims contain attractive precious/base metal exploration
targets. Exploration would be conducted with a phased program involving surface
and underground diamond drilling, further rehabilitation and equipping of the
existing shafts, and level rehabilitation and geologic sampling and mapping.
The existing mine workings, including those rehabilitated by the Company over
1980-1982, will be valuable during future underground exploration and
development work on the Claims.
APOLLO-SITKA RESERVES. The following table sets forth information as to
the Company's probable reserves of gold and silver as of December 30, 1995, with
respect to the Apollo-Sitka Claims:
APOLLO-SITKA INDICATED RESOURCE AND RESERVE
-------------------------------------------
Grade
-----
Ounces per Ton Percent
-------------- -------
Block Tons Au Ag Cu Pb Zn Classification
- - ----- ---- -- -- -- -- -- --------------
APOLLO(1) 2,250,000 .145(2) 8.0 .25 6.0 4.0 Indicated
- - --------- Resource
SITKA(3)
- - --------
A 7,000 .203 2.67 1.54 3.83 3.07 Proven
B 1,650 .188 2.42 1.55 1.48 2.56 Proven
C 8,150 .131 1.73 1.43 3.01 3.36 Proven
Total/Average 16,800 .167 2.19 1.49 3.20 3.16 Proven
- - -------------
D 1,560 .212 2.85 1.76 11.52 2.98 Probable
E 2,390 .096 1.45 .88 3.25 5.96 Probable
F 3,680 .002 .22 .32 .96 1.66 Probable
G 14,670 .001 1.02 .53 12.55 1.76 Probable
Total/Average 22,300 .026 1.06 .62 9.57 2.28 Probable
- - -------------
TOTAL/AVERAGE 39,100 .086 1.55 .99 6.83 2.66 Proven
- - -------------
- - -------------------------
(1) Based solely on Frank R. Brown's report, APOLLO CONSOLIDATED GOLD MINING
COMPANY, 1935, Mr. Brown classified the reserve as "Probable". The reserve
is re-classified as an INDICATED RESOURCE, which conforms to current
guidelines for reporting resources and reserves.
(2) Based on the assumption that Mr. Brown used a $20.67 per ounce gold price
in his 1935 report.
(3) Alaska Apollo Gold Mines, Ltd., internal report, 12/83.
THE SHUMAGIN CLAIMS. The Shumagin Claims are located approximately 2.5
miles north of the Apollo-Sitka Claims and consist of six State of Alaska mining
claims. They are connected to the Apollo-Sitka Claims by a three-mile road.
Gold and silver mineralization was encountered on the Shumagin Claims in 1983,
when the Company diamond drilled 3,190 feet.
9
From its discovery in 1983 to December 31, 1995, management estimates that
the Company has spent $5.5 million on exploration of the Shumagin Claims. Funds
for this exploration were provided by a party interested in the exploration of
the claims (approximately $350,000 in 1989) and the balance through the sale of
the Company's Common Stock in 1983 ($3,002,272), 1985 ($416,305) and 1987
($1,613,382) and from corporate funds during 1994 and 1995.
An independently prepared reserve estimate, incorporating the ore intercept
in a deep 1990 diamond drill hole as well as the previous Company's raw drill
hole and trench data, was completed by Edward O. Strandberg, Jr., P.E., Mining
Engineer, on March 30, 1995. The ore reserves are defined by 17,963 feet of
diamond drilling, 1,827 feet of percussion drilling, 1,017 feet of trenching,
286 feet of crosscuts, and 641 feet of drift. The reserves appear to be
contained in six ore shoots ranging over 1,334 feet vertically and 1,782 feet
horizontally. Strong structural control of the ore deposit is evident. The
deposit is open in all quadrants and at depth.
Ore continuity determined by the exploration work allows classification of
the reserve as drill/trench-inferred and inferred ore. Drill/trench-inferred
reserves are determined based upon geologic inference and drilling and/or
trenching. The inferred reserve is estimated by projection from or between
drill/trench-inferred ore blocks. Reserves in both classifications are mineable
reserves, based on a current site specific operating cost estimate for
underground cut and fill mining of the ore with shaft access.
A break-even cutoff grade of 0.27 ounce gold per ton was determined at a
200 ton per day cut and fill ore production rate and a $375 gold price. The
break-even grade is sensitive to mining and milling costs, the gold price, and
mill recovery. Fixed costs, such as royalties and gold refining charges further
impact the break-even cutoff grade. A minimum mining width of four feet and a
tonnage factor of 12 cubic feet per ton were employed.
Additional exploration work is necessary in order to verify the reserves as
demonstrated mineable reserves in the proven and probable measured reserve
categories, and to expand reserves. It is anticipated that this work will
include surface exploration, diamond drilling, shaft sinking and exploration
drifting, crosscutting, raising, and diamond drilling from underground drill
stations. A decision to place the ore deposit in production is contingent upon
favorable completion of further exploration and preliminary and final
feasibility studies.
The Aleut Corporation controls approximately 10 percent of the
drill/trench-inferred gold reserve and approximately 31 percent of the inferred
gold reserve. This distribution is based on vertical claim line boundaries on
the Shumagin patented claim pattern. The Aleut Corporation's share in current
gold reserves is assumed to be in ore outside the vertical downward projection
of the patented claim pattern. The ore reserve division assumes no assertion of
extra lateral rights by either the Company or the State of Alaska.
The increase in reserves over 1993-1994 levels reflected in the March 30,
1995 estimate is the result of the incorporation of a deep 1990 diamond drill
hold drill log and assay data and additional geologic interpretation in the
reserve analysis. Classification of the Reserve as drill/trench-inferred and
inferred ore in the 1995 reserve estimate is consistent with current industry
practice.
THE SHUMAGIN GOLD AND SILVER RESERVES. The following table sets forth
information as to the Company's reserves of gold and silver as of December 30,
1995, with respect to the Shumagin Claims.
10
SHUMAGIN RESERVE (3/30/95)
(UNCUT AND UNDILUTED)
---------------------
Grade, Ounces per Ton Ounces
--------------------- ------
Tons Gold Silver Gold Silver
---- ---- ------ ---- ------
Drill/Trench Inferred 149,283 .891 4.24 133,005 633,081
- - ---------------------
Inferred 131,052 .700 3.00 91,755 392,794
--------
Total/Average 280,335 .802 3.66 224,760 1,025,875
- - -------------
The Shumagin reserve estimate was prepared by Edward O. Strandberg, Jr.,
P.E., independent consulting mining engineer and documented in a report dated
March 30, 1995. Since March 30, 1995, no major favorable or adverse event has
occurred which the Company believes significantly affects or changes estimated
reserve quantities as of that date.
CLIMATE. The climate relating to the mining properties is relatively mild
due to the proximity of the Japanese Current. The temperature rarely falls
below zero degrees Fahrenheit and the ocean has a mean temperature of 53 degrees
Fahrenheit. The annual average rainfall on Unga Island is between 45 and 50
inches, one-third of this falling as snow. Unga Island is on the same latitude
as Ireland and Denmark.
COMPETITION. The mining industry is intensely competitive. The Company
competes with numerous individuals and companies, including major mining
companies which have greater technical and financial resources than the Company.
The level of competition for desirable mining leases, suitable prospects for
drilling operations, and for project funds is high.
PERMITTING. Various permits are required from governmental bodies for
exploration, development, and mining operations to be conducted. No assurance
can be given that such permits will be received, or that environmental standards
imposed by federal, state, or local authorities will not be changed with
material adverse effects on the Company's activities. Compliance with such laws
may cause delays and require additional capital. The Company may be subject to
environmental damage liability which it may elect not to insure against due to
prohibitive premium costs and other reasons. The Company continues to respect
and make every effort to preserve the environment and terrain of Unga Island.
The Company is in compliance with all federal, state and local laws relating to
current activities.
EMPLOYEES
At December 31, 1995, the Company employed 11 persons.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and current offices of the executive officers of the
Company, who are to serve until the next regular meeting of the Board of
Directors to be held in 1996, and serving as of the date of this Report, are set
forth below. Also indicated is the date when each such person commenced serving
as an executive officer of the Company.
DATE BECAME
NAME AND AGE OFFICE EXECUTIVE OFFICER
---------- ------ ---------------
William S. Daugherty (41). . . . . . . . . . . . Chairman of the Board of Directors, and President September 1993
Timothy F. Guthrie (38). . . . . . . . . . . . . Secretary and Chief Financial Officer November 1995
A description of the business experience during the past several years for
each of the executive officers of the Company and certain significant employees
of the Company is set forth below.
11
William S. Daugherty has served as President of the Company since
September, 1993, when he acquired 1,250,000 shares of the Common Stock in
exchange for all of his common stock in Daugherty Petroleum. He has served as
President of Daugherty Petroleum since 1984. Mr. Daugherty has been involved in
oil and gas production since 1981. He received a Bachelor of Science degree in
Agriculture from Berea College in 1976. He was Branch Manager of the Albany,
Kentucky Production Credit Association (now Farm Credit Services) office from
1977 until 1980. Between 1980 and 1981, he served as principal loan officer for
New Ventures Capital Corporation, a subsidiary of Kentucky Highlands Investment
Corporation. Between 1981 and 1984, Mr. Daugherty served as Vice President of
Petro-7, Inc., an oil and gas drilling and production company. Since 1984, Mr.
Daugherty served as President of Daugherty Petroleum. In 1993, Mr. Daugherty
was appointed President of the Company, and, subsequently, in November, 1995,
was appointed Chairman of the Board. Mr. Daugherty is past President of the
Kentucky Independent Petroleum Producers Association. He currently serves as
President of the Kentucky Oil and Gas Association. He also serves as the
Kentucky Governor's Representative to the Interstate Oil and Gas Compact
Commission.
Timothy F. Guthrie joined Daugherty Petroleum in 1994 and serves as
Secretary and Chief Financial Officer. In November, 1995, Mr. Guthrie was
appointed as Chief Financial Officer and Secretary of the Company. Mr. Guthrie
received a Bachelor of Science in Business Administration in 1982 and a Masters
in Business Administration in 1984 from Murray State University. Since 1990,
Mr. Guthrie has served as President of CFO Services, Inc., a consulting firm
that provides temporary and interim Chief Financial Officer and Controller
services to companies and due diligence and investment monitoring services for
various investor groups. He served as Investment Officer for Kentucky Highlands
Investment Corporation from 1988 to 1990.
ITEM 2. PROPERTIES
In addition to the properties discussed above with respect to each business
segment, the Company leases office space in Lexington, Kentucky for its
executive offices pursuant to a lease which will expire in July 1997. The
Company believes its facilities are adequate and suitable for its current level
of operations. The Company also owns a field office, repair shop and storage
yard in Williamsburg, Kentucky. The property is near the gas fields in
southeast Kentucky and is used as storage for equipment owned by Daugherty
Petroleum. The Company also leases a portion of the buildings as residential
apartments and a maintenance shop. The Company maintains customary
compensation, liability, and property insurance for all of its operations, which
also includes well coverage for oil and gas exploration and production
activities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of its business. The Company
maintains insurance coverage against potential claims in an amount which it
believes to be adequate. The Company believes that it is not presently a party
to any litigation the outcome of which would have a material adverse effect on
its results of operations or financial condition.
ITEM 4. OTHER EVENTS
A Civil Action was filed in the United States District Court for the
Eastern District of Michigan by J. Rudolph Oliver against the Company, Daugherty
Petroleum, Inc., William S. Daugherty, Inc., the President of the Company,
Southern Drilling Company, Inc., Wentzloff Energy, Inc., and the Company's
attorneys, Breeding, McIntyre & Cunningham, P.S.C. and Robert McIntyre. The
plaintiff alleged he was a shareholder of Southern Drilling Company, Inc., and
Wentzloff Energy, Inc., and sought to set aside the sale in 1994 to the Company
of 6.5 billion cubic feet of natural gas, 6,500 acres of oil and gas leases and
certain pipelines and equipment. Mr. Oliver alleged that the sale was
accomplished without the prior approval of the shareholders or the Boards of
Directors of Southern Drilling Company, Inc., and Wentzloff Energy, Inc. This
action was dismissed on February 13, 1996, for lack of jurisdiction.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
12
PART II
ITEM 6. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the NASDAQ system in the United
States. There is no trading of the Common Stock in Canada. The range of the
high and low bid information for the Common Stock for each full quarterly period
within the two most recent fiscal years is shown on the following table. As of
May 13, 1996, the Company was authorized to issue 20,000,000 shares of the
Common Stock, of which there were issued and outstanding 7,742,710 shares. On
October 14, 1992, the Company completed a share recapitalization pursuant to
which the Company's authorized capital was consolidated from 20,000,000 shares
of the Common Stock to 6,000,000 shares. On September 9, 1993, the Company's
authorized capital was increased to 20,000,000 shares of the Common Stock. No
dividends were declared or paid during such periods.
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
QUARTER ENDED: 1995 1995 1995 1995 1994 1994 1994 1994
- - ------------- ------ ------ ------ ------ ------ ------ ------ ---------
Low bid price . . . . . . . . . . . . . 1/2 3/4 3/4 1 1/2 5/8 1/2 1-1/8
High bid price. . . . . . . . . . . . . 1/4 13/32 17/32 3/4 1 1 1-1/8 1-7/8
As of May 13, 1996, the high and low bids with respect to the price of the
Common Stock were both 3/8. The NASDAQ quotations represent interdealer prices,
without mark-ups, commissions, etc., and they may not necessarily be indicative
of actual sales prices.
As of December 31, 1995, there were 3,063 holders of record of the Common
Stock, of whom 2,969 were United States shareholders holding a total of
6,632,632 shares or approximately 86 percent of the issued and outstanding
shares of the Common Stock.
FOREIGN LAWS AFFECTING THE COMMON STOCK
EXCHANGE CONTROLS AND OTHER LIMITATIONS. There are no governmental laws,
decrees or regulations in Canada relating to restrictions on the import/export
of capital or affecting the remittance of interest, dividends or other payments
to non-resident holders of the shares of the Common Stock. Any such remittances
to United States residents, however, are subject to a 15 percent withholding tax
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. (See below).
Except as provided in the Investment Canada Act, there are no limitations
under the laws of Canada, the Province of British Columbia or in the charter or
any of the constituent documents of the Company on the right of foreigners to
hold and/or vote the shares of the Common Stock.
The Investment Canada Act essentially requires a non-Canadian making an
investment to acquire control of a Canadian business, the investment in which
exceeds $150,000,000, to file an application for review with Investment Canada,
the Canadian federal agency created by the Investment Canada Act. Where the
acquisition of control is indirect and made by a non-Canadian (other than an
American, as defined) (for example by the purchase of shares in a controlling
parent corporation which has a Canadian business subsidiary) the threshold is
$500 million. For Americans, there is no review of such indirect acquisitions.
The proposed investment, if above the threshold, may not proceed unless the
Investment Canada agency and its responsible minister are satisfied that the
investment will be of benefit to Canada.
A Canadian business is defined in the Investment Canada Act as a business
carried on in Canada that has a place of business in Canada, an individual or
individuals in Canada who are employed or self-employed in connection with the
business, and assets in Canada used in carrying on the business. An American,
as defined in the Investment Canada Act, includes an individual who is a United
States citizen or a lawful permanent resident of the United States, a government
or governmental agency of the United States, an American-controlled entity,
corporation or limited partnership, and a corporation, limited partnership or
trust of which two-thirds of its directors, general partners or trustees, as the
case may be, are Americans.
13
The acquisitions of certain Canadian businesses are excluded from the
$150,000,000 threshold and remain subject to review in any event. These
excluded businesses are oil, gas, uranium, financial services (except
insurance), transportation services and cultural and broadcast media services
(I.E., the publication, distribution or sale of books, magazines, periodicals,
other than printing or typesetting businesses, television and radio services).
TAXATION. Generally, dividends paid by Canadian corporations to non-
resident shareholders are subject to a withholding tax of 25 percent of the
gross amount of such dividends. However, Article X of the reciprocal tax treaty
between Canada and the United States reduces to 15 percent the withholding tax
on the gross amount of dividends paid to residents of the United States. A
further five percent reduction in the withholding rate on the gross amount of
dividends is applicable when a United States corporation owns at least 10
percent of the voting stock of the Canadian corporation paying the dividends.
A non-resident of Canada who holds shares of the Common Stock of the
Company as capital property will not be subject to tax on capital gains realized
on the disposition of such shares unless such shares are "taxable Canadian
property" within the meaning of the Canadian Income Tax Act and no relief is
afforded under any applicable tax treaty. The shares of the Common Stock would
be "taxable Canadian property" of a non-resident if at any time during the five
year period immediately preceding a disposition by the non-resident of such
shares not less than 25 percent of the issued shares of any class of the Company
belonged to the non-resident, the person with whom the non-resident did not deal
at arm's length, or to the non-resident and any person with whom the non-
resident did not deal at arm's length.
ITEM 7. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information for
the periods presented and should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Report.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 (1) 1992 1991
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $2,052,222 $2,458,835 $71,838 $ -0- $ -0-
Direct Expenses . . . . . . . . . . . . . . . . . . . . 1,660,043 1,156,648 -0- -0- -0-
Operating income (loss) . . . . . . . . . . . . . . . . (1,437,437) (173,335) (258,861) (121,073) (137,330)
Income (loss) from continuing operations . . . . . . . . (1,440,003) (174,823) (251,021) (121,073) (137,330)
Per share income (loss) from continuing operations . . . (0.19) (0.03) (0.07) (0.09) (0.17)
CASH FLOW DATA:
Capital expenditures . . . . . . . . . . . . . . . . . . 197,354 3,781,088 2,734,235 4,192 20,037
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . . . . . (692,600) 226,174 228,212 92,744 167,671
Property and equipment, net . . . . . . . . . . . . . . 15,657,153 15,678,048 12,019,231 11,087,314 11,083,122
Total assets . . . . . . . . . . . . . . . . . . . . . . 18,220,555 18,701,045 14,383,366 11,259,701 11,081,232
Current maturities of long-term debt . . . . . . . . . . 218,458 86,304 66,052 24,000 30,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . 913,986 849,025 682,760 642,818 666,818
Stockholders' investment . . . . . . . . . . . . . . . . 15,573,940 19,784,443 16,195,391 13,106,259 12,706,259
- - ------------------
(1) Financial data for 1993 reflects the acquisition of Daugherty Petroleum,
Inc. by the Company.
ITEM 8. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the Company's financial condition and
results of operations. This discussion should be read in conjunction with the
Audited Financial Statements of the Company appearing under Item 9 of this
Report.
14
LIQUIDITY
With the acquisition of Daugherty Petroleum in the fourth quarter of 1993,
the Company began a strategy of aggressively acquiring natural gas and oil
properties in southeastern and western Kentucky. Daugherty Petroleum has
provided the Company with a diversified asset base which includes natural
resources other than its prospective gold and silver mining properties and has
also increased the Company's asset base. During 1995, management also invested
in areas it deemed critical in developing an infrastructure suitable to support
its future growth. These areas included ongoing expenses such as increases in
management, professional and operational personnel and other one time expenses
deemed necessary to position the Company for future acquisitions and financing.
The Company has traditionally realized revenues from two primary sources.
The first is from its interests in the producing natural gas and oil wells it
operates or in which it owns fractional interests. The second source of revenue
for the Company is derived from its activities as a "turnkey driller" and
operator for various drilling programs within its geographic area. As discussed
below, during 1995, approximately 88 percent of the Company's revenues were
derived from these activities. The Company derived approximately 70 percent of
these revenues from its activities as a turnkey driller for various partnerships
and joint ventures. Production from its interests in natural gas and oil wells
accounted for approximately 27 percent of these revenues. The remaining three
percent of oil and gas revenues were derived from operational activities and
lease sales.
The Company plans to drill 25 wells during 1996 and will attempt to earn
interests ranging from 7.5 percent to 25 percent net revenue interests in each
well it drills as a program sponsor or turnkey driller. In addition, the
Company is currently negotiating with several prospective joint venture partners
to develop its existing leased acreage as well as acreage it anticipates
obtaining early in 1996. Management believes that these negotiations will
result in the drilling of 15 to 20 wells during 1996.
During 1995, the Company realized additional revenues from the purchase and
sale of lumber related to a proposed acquisition of a hardwood lumber
manufacturing facility. Revenues related to this activity accounted for 12
percent of the Company's total gross revenues.
During 1995, the Company has held negotiations with several potential
financial institutions and investors with the intent of securing financing
necessary to provide short and long term credit facilities to support both
existing and future capital requirements. In addition, the increase in
production resulting from the acquisition of various natural gas and oil
reserves, the addition of new wells drilled and completed in 1995, as well as
projected turnkey drilling programs will, in the opinion of management, provide
sufficient cash flow to meet the short term operating needs and financial
commitments of the Company. It is expected that the Company's revenues will be
further enhanced in 1996 as additional revenue sources materialize from
agreements reached during 1995, such as the operation of the natural gas
pipeline gathering system, activities related to the Upper Cumberland Utility
District discussed below, and the completion of the acquisition of the hardwood
lumber manufacturer.
Working capital for the period ending December 31, 1995, was a negative
$692,600, and compared to the same period in 1994, reflected a decrease of
$919,774.
During 1995, the major change in the composition of the Company's current
assets consisted of a decrease in cash balances of $230,467, from $369,447 to
$138,980, a decrease in accounts receivable balances of $281,489, from $791,432
to $509,980 and an increase in other current assets such as inventories,
prepaids and notes receivable of $201,421, from $180,794 to $382,215. The
reduction in accounts receivable balances reflected the Company's increase in
its allowance for bad debts by $137,623 during the period.
Current liabilities grew $608,239 from $1,115,499 to $1,723,738. The major
components of this growth were from the Company's increase in the current
portion of long term debt by $276,325 from $96,340 to $372,665 and an increase
in accounts payable and accrued liabilities of $336,941 from $1,014,159 to
$1,351,073.
During 1995, operating capital was improved by the issuance of 360,130
shares of the Common Stock valued at $283,657 in lieu of cash payments to
various consultants for services provided in 1995.
15
While management believes that the cash flow resulting in its operating
revenues will contribute significantly to its short term financial commitments
and operating costs, it has developed a plan to meet its short term financial
obligations. This plan includes:
- Acquisition of revenue producing properties. As of December 31, 1995,
the Company entered into negotiations with the owner of the working interests in
a total of 35 oil wells for the acquisition of those working interests. This
transaction was completed on March 31, 1996, and was concluded with owner
financing to be paid from production revenues. After debt service, it is
expected that this acquisition will result in a net increase in revenues of
approximately $54,000 per year. Daugherty Petroleum had been operating the
properties under a Participation Agreement whereby it paid all operating
expenses. This agreement originally anticipated the development and
implementation of an enhancement program whereby Daugherty Petroleum would
receive 100 percent of the revenues over and above a base level of production
until it recovered 100 percent the cost of the enhancement. Upon recovery of its
enhancement cost, Daugherty Petroleum was to receive 50 percent of all revenues.
After further engineering analysis, it was determined that the implementation of
an enhancement program was not feasible with the net effect being Daugherty
Petroleum paying all expenses and receiving no revenue. The acquisition will
result in the Company obtaining offsetting revenues in excess of expenses
currently being incurred.
- Sponsorship of a private placement drilling/production program to
investors. As of May 13, 1996, the Company has began the offering of a private
placement drilling/production program to investors through a network of brokers.
This program, if successfully completed, will generate revenues and profits for
the Company earlier in the year than normally occurs with a year end, tax driven
program.
- Sale of non revenue producing oil properties. The Company has entered
negotiations for the sale of a group of oil wells. If successfully completed,
this transaction will result in debt service currently incurred by the Company.
In addition, initial negotiations indicate that the purchaser will contract with
Daugherty Petroleum for the development, enhancement, and operation of these
wells on a cost plus basis.
- Sale of miscellaneous Company assets. The Company owns real estate in
Williamsburg, Kentucky, consisting of a field office and separate
office/apartment building. The Company plans to sell the office/apartment
building and retain the field office which will reduce debt service by
approximately $16,000 per year. The Company has also identified surplus
vehicles and equipment, the sale of which will result in a reduction of debt
service $16,740 per year. As of May 13, 1996, certain of the assets have been
sold or have sales contracts pending.
- Negotiations related to third party loans. The Company is negotiating
with various third party lenders, including major shareholders, to secure short
term loans. If successful, these loans will be available during early 1996. In
December 1995, the Company received a line of credit from its bank in the amount
of $100,000. On February 23, 1996, a major shareholder of the Company made
available to Daugherty Petroleum a line of credit in the amount of $100,000.
- The Company has also negotiated extended payment arrangements with
various vendors.
Due to losses experienced by the Company in 1995, it did not utilize any of
the net operating loss carry forwards available to it for United States and
Canadian tax purposes. As of December 31, 1995, the Company had $7,925,960 in
net loss carry forwards in the United States that will expire from 1996 through
2011. In addition, for Canadian federal tax purposes, these carry forwards are
$1,029,000 and expire at periods through 2002.
CAPITAL RESOURCES
In August, 1995, the Board of Directors approved a plan by Daugherty
Petroleum to acquire through the United States Bankruptcy Court, a hardwood
lumber manufacturing facility and the funding of a total of $520,000 in loans to
complete the transaction. As of December 31, 1995, the Company has secured
loans outstanding in the amount of $200,000 and has commitments of $320,000 in
loans to complete the transaction. As of the date of this Report, the
acquisition has not been finalized.
In 1995, the Company's issued 360,130 shares of the Common Stock under an
S-8 registration as compensation to various consultants for services rendered.
These shares reflected a total value of $283,657 and were issued, without
discount, at a market bid prices ranging from $0.75 to $0.875 per share.
16
The following table summarizes the individual and total number of shares
issued:
Recipient Number of Shares Received
--------- -------------------------
Robert L. McIntyre 54,285
Norman T. Reynolds 18,705
Gary M. Smith 16,286
Cmark, Inc. 15,000
Guthrie York & Company, Inc. 100,000
Arizona Desert Minerals, Inc. 57,717
CFO Services, Inc. 57,617
-------
Total 360,130
-------
-------
RESULTS OF OPERATIONS
For the year ending December 31,1995, the Company's gross revenues declined
20 percent to $2,052,222 from $2,548,835 for the same period in 1994. The
Company experienced a net loss of $1,440,003 in 1994 compared to $174,823 in
1993.
The Company's gross revenues are derived from turnkey contract revenues of
$1,280,115 (62.4 percent); natural gas and oil production revenues of $484,237
(23.6 percent); operating revenues of $41,078 (2.0 percent); lease sales of
$15,000 (0.7 percent); lumber sales of $228,303 (11.1 percent); and
miscellaneous revenues of $3,489 (0.2 percent).
The reduction in gross revenues was attributable primarily to the level of
contract revenue from turnkey drilling activities which declined by $692,134
from $1,972,249 in 1994 to $1,280,115 in 1995. These revenues were derived from
partnerships sponsored by the Company or others who contract with the Company to
drill and operate wells on a contract basis. These partnerships are, to a large
extend, driven by investors' desire for the tax benefits associated with oil and
gas investments. Historically, the drilling activity generated from these
partnerships result in significant year end revenues and drilling activity
during the first three to six months of the following year. In 1995, the
Company sponsored a partnership that was intended to provide these revenues and
that partnership failed to reach the minimum aggregate investment necessary for
it to be completed. In addition, other customers of the Company, that is other
partnerships who would typically use the Company as a turnkey driller and
operator, encountered similar problems in closing year end investments which
adversely impacted the Company's revenues.
During 1995, total operating expenses were $1,829,616 compared to
$1,475,522 in 1994, for an increase of $354,094. Total operating expenses in
1995 included non cash items such as amortization and depreciation of $395,205
and bad debt expense of $137,632. Non cash items included $178,956 for the
amortization of goodwill related to the Company's acquisition of Daugherty
Petroleum. Consulting and management fees increased due to the utilization of
outside contractors for services for accounting and financial management,
engineering of reserve studies and landman costs incurred as result of increased
leasing activities. Advertising, promotional, legal and consulting expenses
increased due to the Company's year end drilling program which failed to
generate any offsetting revenues.
While the Company is successfully achieving its goal of dramatic growth, it
has incurred costs and expenses above historical levels as a result of these
efforts. Management does not expect this trend to continue at the same rate
experienced in 1995 as the Company's infrastructure is developed to support
greater revenues before substantial increases in expenses will be incurred
again.
The Company believes there are three factors that will increase the price
it receives for its natural gas production. First, the acquisition of gas
reserves from Wentzloff Energy and Michigan Southern Energy, Inc., partnerships
is providing a much larger production base with which to negotiate contracts
previously unavailable to the Company. Secondly, the natural gas gathering
systems completed in 1995 and currently under construction will allow the
Company to diversify its customer base and access markets where prices are
higher. Thirdly, natural gas prices in 1996 are up significantly over 1995, and
projected market trends indicate that higher prices will prevail throughout
1996. The combined effect will be the a higher overall price for the Company's
production. The Company intends to aggressively pursue new contracts based on
its increased reserves, increased production capacity and improved distribution.
17
On May 13, 1994, Daugherty Petroleum executed a letter of intent with the
Upper Cumberland Utility District to act as its exclusive marketer/aggregator
and supplier of natural gas. Pursuant to the letter of intent, Daugherty
Petroleum is to receive $0.15 per thousand cubic feet ($0.15/Mcf) of gas
supplied and delivered to Upper Cumberland. Daugherty Petroleum also has the
option to purchase all transportation space available on the District's system
in excess of that quantity required by the District to supply its residential
and commercial customers. Daugherty Petroleum shall pay the sum of $0.25 per
thousand cubic feet ($0.25/Mcf) of natural gas transported for Daugherty
Petroleum or its designees. During 1995, Daugherty Petroleum provided financing
in the form of an advance payment and loans to the District to be used as
working capital. As of the date of this Report, the Company has made advance
payments of $10,000 to the District.
Although the Company is a corporation incorporated in the Province of
British Columbia, Canada, all assets of the Company and all sources of revenue
are within the United States. As a company incorporated in British Columbia,
the Company is required under Canadian corporate law to a use a Canadian
chartered accounted firm. On April 25, 1995, the Company's Canadian accountants
advised the Company that "There are no material differences between generally
accepted accounting principles in Canada and the United States which would
either increase or decrease net loss for the year or the accumulated deficit."
ITEM 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 appears on pages 32 through 48 of
this Report, and is incorporated herein by reference.
ITEM 10. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
18
PART III
ITEM 11. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information set forth under "Item 1. Business - Executive Officers of
the Registrant" is incorporated herein by reference. At the date of this
Report, the executive officers of the Company were William S. Daugherty and
Timothy F. Guthrie.
William S. Daugherty failed to file a Form 3 on a timely basis upon
becoming an executive officer and director of the Company in fiscal 1993. James
K. Klyman-Mowczan, Milton Klyman, and Colin R. Bowdidge each failed to file a
Form 3 on a timely basis upon becoming a director of the Company in fiscal 1992.
William S. Daugherty, James K. Klyman- Mowczan, and Colin R. Bowdidge each
failed to file a Form 4 on a timely basis after the receipt of options granted
by the Company in January, 1994. Finally, Messrs. Daugherty, Klyman-Mowczan,
Bowdidge and Klyman each failed to file on a timely basis a Form 5 for fiscal
1993.
Set forth below are the directors of the Company, together with their ages
as of the date of this Report. Each director is elected for a one year term and
serves until his successor is elected and qualified.
Name Age Position Director Since
---- --- -------- --------------
William S. Daugherty(1). . . . . . . . . 41 Chairman of the Board of Directors September 1993
James K. Klyman-Mowczan(1) . . . . . . . 38 Director May 1992
Charles L. Cotterell . . . . . . . . . . 71 Director June 1994
- - ----------------------
(1) Member of the Audit Committee.
Certain information with respect to the members of the Board of Directors
of the Company is set forth below.
William S. Daugherty has served as a directors of the Company since
September 1993, when he acquired 1,250,000 shares of the Common Stock in
exchange for all of his common stock in Daugherty Petroleum. In December 1995,
Mr. Daugherty was elected as Chairman of the Board of Directors. Mr. Daugherty
has served as President of Daugherty Petroleum since 1984. See "Item 13.
Certain Relationships and Related Transactions - Daugherty Petroleum, Inc. and
Indebtedness of Management to the Company."
James K. Klyman-Mowczan was elected a director of the Company in September
1992. For the past five years he has been a computer software designer and
programmer specializing in applied information technology.
Charles L. Cotterell, age 71, has been a director since June 1994. Mr.
Cotterell has been involved in the resources industry and has participated in
the natural gas and oil industries in Western Canada and the United States,
particularly in Kentucky. He is a Vice President of Konal Engineering Co. Ltd.,
is a past director of Mariner Mines, Ltd., Nordustrial, Ltd., Goliath Boat Co.,
and Dominion Power Press Equipment Co., Ltd., and the past President of Smith
Press Automation Co., Ltd.
19
ITEM 12. EXECUTIVE COMPENSATION
The following table sets forth information regarding annual and long-term
compensation with respect to the fiscal years ended December 31, 1995, 1994 and
1993 for services in all capacities rendered to the Company by those persons who
were, at December 31, 1995, (i) the Company's chief executive officer, and (ii)
the other executive officer of the Company.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------- ------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS (1) OPTIONS (#)
---------------------- ---- --------- -------- ---------
William S. Daugherty, Chairman and President (2). . . . . . . .1995 100,000 50,000 600,000
1994 100,000 -0- 200,000
1993 25,000 -0- -0-
Timothy F. Guthrie, Secretary . . . . . . . . . . . . . . . . .1995 78,215 50,000 200,000
and Chief Financial Officer (3) 1994 40,534 -0- -0-
- - --------------------
(1) The bonus was in the form of shares of the Common Stock.
(2) Mr. Daugherty became an executive officer of the Company in September 1993.
Consequently, he only received the sum of $25,000 during 1993 for his services
as an executive officer of the Company.
(3) Mr. Guthrie became an executive officer of the Company in November 1995,
although he has performed contract work for the Company since May 1994.
While the officers of the Company do receive benefits in the form of
certain perquisites, none of the individuals identified in the foregoing table
has received perquisites which exceed in value the lesser of $50,000 or 10
percent of such officer's salary and bonus.
The following table shows the number of shares of the Common Stock
underlying all exercisable and non-exercisable stock options held by the named
executive officers as of December 31, 1995.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END($)
-------------------- ----------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- -------------------- ----------------------
William S. Daugherty. . . . . . . . . . . . . 200,000/400,000 -0-
Timothy F. Guthrie. . . . . . . . . . . . . . 75,000/125,000 -0-
- - --------------------
(1) The market price for the shares of the Common Stock at December 31, 1995
was below the option price for each share of the Common Stock.
Mr. Daugherty received an option to purchase 200,000 shares of the Common
Stock in 1994 exercisable at $2.00 per share in increments of 50,000 shares each
on December 10, 1994, 1995, 1996, and 1997 up to and including December 10,
1998. In February 1995, the Board of Directors of the Company authorized the
granting of options covering 200,000 shares of the Common Stock exercisable at
$1.00 per share to Mr. Daugherty as a bonus, and an additional 25,000 shares of
the Common Stock. In December 1995, the Board of Directors authorized the
granting of options covering an additional 200,000 shares of the Common Stock to
Mr. Daugherty, exercisable at a price of $1.00 per share. As of May 13, 1996,
none of the options authorized in February or December 1995 have been granted to
Mr. Daugherty. If and when such options are granted, they will be granted over
a period of four years, with the first year's allocation being vested and
exercisable immediately. The options, if they are granted, will expire five
years from the date they vest and become exercisable. Each option authorized in
February and December 1995 is contingent upon Mr. Daugherty's employment at the
time the option vests.
In February and December 1995, the Board of Directors of the Company
authorized the granting of incentive stock options totaling 200,000 shares of
the Common Stock for Mr. Guthrie. As of May 13, 1996, none of the options
authorized in February or December 1995 have been granted to Mr. Guthrie. If
and when such options are granted, they will be granted over a period of four
years, with the first year's allocation being vested and exercisable
immediately. The options will be
20
exercisable at a price of $1.00 per share. The options, if they are granted,
will expire five years from the date they vest and become exercisable. Each
option authorized in 1995 is contingent upon Mr. Guthrie's employment at the
time the option vests. Guthrie York & Company, Inc., a firm in which Mr.
Guthrie is a principal, holds options to acquire 100,000 shares of the Common
Stock at $1.00 per share. The options in favor of Guthrie York & Company, Inc.
were granted in February 1995 and expire in February 1997.
COMPENSATION OF DIRECTORS
The Company does not compensate any of its directors for their services to
the Company as directors. However, the Company does reimburse its directors for
expenses incurred in attending board meetings. Further, the Company has granted
options to acquire shares of the Common Stock to following current and former
directors of the Company, other than Mr. Daugherty.
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS AT
YEAR-END (#) FISCAL YEAR-END (3)
-------------------- -----------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- -------------------- -----------------
John R. Bogert (2). . . . . . . . 25,000/0 -0-
James K. Klyman-Mowczan . . . . . 20,000/0 -0-
Colin R. Bowdidge (3) . . . . . . 10,000/0 -0-
Charles L. Cotterell. . . . . . . 20,000/0 -0-
- - --------------------
(1) The market price for the shares of the Common Stock at December 31, 1995
was below the option price for each share of the Common Stock.
(2) Mr. Bogert retired as an officer and director of the Company in 1995.
(3) Mr. Bowdidge retired as a director of the Company in 1994.
Mr. Bogert was granted an option to purchase 33,333 shares of the Common
Stock in 1990 exercisable at $3.00 per share up to and including December 31,
1995. In June 1994, the Board of Directors approved the reduction of the
exercise price of these previously granted options to $1.00. Mr. Bogert was
granted an additional option to purchase 100,000 shares of the Common Stock in
1994 exercisable at $1.00 per share in increments of 25,000 shares each on
December 10, 1994, 1995, 1996, and 1997 up to and including December 10, 1998.
As a result of Mr. Bogert's resignation in November 1995, the Company has
committed 25,000 shares to these options, and the remaining options for 75,000
shares have been canceled. Mr. Klyman-Mowczan was granted an option to purchase
10,000 shares of the Common Stock in 1994 exercisable at $1.00 per share up to
and including December 10, 1998. Mr. Bowdidge was granted an option to purchase
10,000 shares of the Common Stock in 1994 exercisable at $1.00 per share up to
and including December 10, 1998. Mr. Cotterell was granted an option to
purchase 10,000 shares of the Common Stock in 1994 exercisable at $1.00 per
share up to and including December 10, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a Compensation Committee or other Board committee
performing an equivalent function. However, during the last completed fiscal
year of the Company, William S. Daugherty and Charles L. Cotterell, two of the
directors of the Company, participated in deliberations of the Company's Board
of Directors concerning executive officer compensation.
21
ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information relates to the holders of the Company's voting
securities known to the Company on May 13, 1996, to own beneficially five
percent or more of any class of the Company's voting securities. For the
purposes of this Proxy Statement, beneficial ownership of securities is defined
in accordance with the rules of the Securities and Exchange Commission (the
"Commission") to mean generally the power to vote or dispose of securities,
regardless of any economic interest therein.
SHARES OWNED PERCENT
TITLE OF CLASS NAME AND ADDRESS BENEFICIALLY OF CLASS
- - -------------- ---------------- ------------ --------
Common Stock William S. Daugherty
131 Prosperous Place, Suite 17-A
Lexington, Kentucky 40509 1,300,000 16.8
Howe & Co. (1)
P.O. Box 10338
Vancouver, British Columbia V74 1J9 943,144 12.2
Cede & Co. (2)
P.O. Box 222
Bowling Green Station
New York, New York 10004 3,188,057 41.2
- - --------------------
(1) The beneficial ownership of these shares of the Common Stock is not known.
(2) The beneficial ownership of these shares of the Common Stock is not known.
However, according to a Schedule 13D delivered to the Company, management
believes that Alaska Investments Ltd., whose address is Osprey House, 5 Old
Street, St. Helier, Jersey, Channel Islands, is the beneficial owner of
1,013,334 or 13.7 percent of the shares of the Common Stock. Likewise,
according to a Schedule 13D delivered to the Company, management believes that
Gracechurch Securities Ltd., whose address is 21 Abbotsbury House, Abbotsbury
Road, London W14 8EN, England, is the beneficial owner of 1,103,000 or 14.9
percent of the shares of the Common Stock. It is possible that some portion of
the shares of the Common Stock held by Cede & Co. are beneficially owned by
either one or both of Alaska Investments Ltd. and Gracechurch Securities Ltd.
Set forth below is certain information with respect to beneficial ownership
of the Company's Common Stock as of May 13, 1996 by each director, nominee for
director, the executive officers and by directors and executive officers as a
group.
SHARES OWNED PERCENT
TITLE OF CLASS NAME BENEFICIALLY (1) OF CLASS
- - -------------- ---- --------------- ---------
Common Stock William S. Daugherty (2) 1,300,000 16.1
James K. Klyman-Mowczan (3) -0- *
Charles L. Cotterell (4) 20,000 *
Timothy F. Guthrie (5) 129,086 1.6
All of the above and other executive
officers as a group (4) persons 1,449,086 18.7
- - --------------------
* Less than one percent.
(1) Except as otherwise noted, individuals listed in the table have sole voting
and investment power with respect to the indicated shares.
(2) Mr. Daugherty received an option to purchase 200,000 shares of the Common
Stock in 1994 exercisable at $2.00 per share in increments of 50,000 shares each
on December 10, 1994, 1995, 1996, and 1997 up to and including December 10,
1998. In February 1995, the Board of Directors of the Company authorized the
granting of options covering 200,000 shares of the Common Stock exercisable at
$1.00 per share to Mr. Daugherty and an additional 25,000 shares of the Common
Stock as a bonus. In December 1995, the Board of Directors authorized the
granting of options covering an additional 200,000 shares of the Common Stock to
Mr. Daugherty, exercisable at a price of $1.00 per share and an additional 25,
000 shares of the Common Stock as a bonus. As of May 13, 1996, none of the
options authorized in February or December 1995 have been granted to Mr.
Daugherty. If and when such options are granted, they will be granted over a
period of four years, with the first year's allocation being vested and
exercisable immediately. The options, if they are granted, will expire five
years from the date they vest and become exercisable. Each option authorized in
February and December 1995 is contingent upon Mr. Daugherty's employment at the
time the option vests.
(3) Mr. Klyman-Mowczan received an option to acquire 10,000 shares of the
Common Stock in 1994 at $1.00 per share, which option expires on December 10,
1998. In 1995, Mr. Klyman-Mowczan received an option to acquire an additional
10,000 shares of the Common Stock at $1.00 per share, which option expires on
December 27, 2000.
(4) Mr. Cotterell received an option to acquire 10,000 shares of the Common
Stock in 1994 at $1.00 per share, which option expires on December 10, 1998. In
1995, Mr. Cotterell received an option to acquire an additional 10,000 shares of
the Common Stock at $1.00 per share, which option expires on December 27, 2000.
(5) Included in the 129,086 shares of the Common Stock allocated to Mr. Guthrie
are 65,205 shares owned by CFO Services, Inc., a firm wholly-owned by Mr.
Guthrie, 48,000 shares owned by Guthrie, York & Company, Inc., a company in
which Mr. Guthrie is a principal, and 15,881 shares controlled by Mr. Guthrie
personally. In addition, 50,000 shares of the Common Stock have been committed
to Mr. Guthrie, but they have not yet been issued. Further, in February and
December 1995, the Board of Directors of the Company authorized the granting of
incentive stock options covering 200,000 shares of the Common Stock for Mr.
Guthrie. As of May 13, 1996, none of the options authorized in February or
December 1995 have been granted to Mr.
22
Guthrie. If and when such options are granted, they will be granted over a
period of four years, with the first year's allocation being vested and
exercisable immediately. The options will be exercisable at a price of $1.00
per share. The options, if they are granted, will expire five years from the
date they vest and become exercisable. Each option authorized in 1995 is
contingent upon Mr. Guthrie's employment at the time the option vests. Guthrie
York & Company, Inc., a firm in which Mr. Guthrie is a principal, holds options
to acquire 100,000 shares of the Common Stock at $1.00 per share. The options
in favor of Guthrie York & Company, Inc. were granted in February 1995 and
expire in February 1997.
In February 1995, the Board of Directors authorized the issuance of 100,000
shares of the Common Stock as a bonus to key employees. Twenty-five thousand
shares each were allocated to Messrs. Daugherty and Guthrie and 50,000 shares
were allocated to other employees at Mr. Daugherty's discretion. In December
1995, an additional 125,000 shares were authorized as bonuses. Messrs.
Daugherty and Guthrie were each allocated 25,000 shares, and 75,000 shares were
allocated to other key employees at Mr. Daugherty's discretion. As of May 13,
1996, none of the shares have been issued.
ITEM 14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF DIRECTORS, OFFICERS AND EMPLOYEES
As of May 13, 1996, the aggregate indebtedness to the Company and to any
other person which is the subject of a guarantee, support agreement, letter of
credit or other similar arrangement or understanding provided by the Company of
all present and former directors, officers and employees of the Company was
$140,574.
LARGEST AMOUNT
NAME AND INVOLVEMENT OF OUTSTANDING DURING LAST AMOUNT OUTSTANDING
PRINCIPAL POSITION ISSUER OR SUBSIDIARY COMPLETED FISCAL YEAR AS OF MAY 13 1996
------------------ -------------------- --------------------- ------------------
William S. Daugherty (1)(3) Lender $110,266 $105,974
President and Chief
Operating Officer
Timothy F. Guthrie (2)(3)(4) Lender $101,700 $ 34,600
Secretary and Chief
Financial Officer
Daugherty Petroleum, Inc.
- - --------------------
(1) Part of the indebtedness of Mr. Daugherty to the Company is evidenced by a
promissory note dated September 23, 1993 in the principal amount of $50,000.
The debt was incurred to assist Mr. Daugherty in the payment of his legal
expenses resulting from the acquisition by the Company of Daugherty Petroleum,
Inc. By the terms of the note, the unpaid principal bears interest at the rate
of six percent per annum and is repayable in monthly instalments of not less
than $1,000 per month. Repayment commenced in November 1993. As of December
31, 1995, the unpaid principal balance due on the note was $28,377.22. Any
unpaid balance is payable in full on December 31, 1997. The note is unsecured.
As of May 13, 1996, the unpaid principal balance of the note was $24,086.00.
Further, as of December 31, 1995 and May 13, 1996, Sentra Petroleum, Inc., a
company wholly-owned by Mr. Daugherty, was indebted to the Company's wholly-
owned subsidiary, Daugherty Petroleum, Inc, in the amount of $21,000 as a result
of a turnkey contract for one well drilled by Daugherty Petroleum, Inc. in the
Gausdale Field in Kentucky. As of December 31, 1995, a company wholly-owned by
Mr. Daugherty was indebted to Daugherty Petroleum in the amount of $17,556.
(2) During 1995, CFO Services, Inc., a company owned by Mr. Guthrie, was
indebted to the Company in the amount of $78,367. This indebtedness was
evidenced by a promissory note payable to the order of the Company bearing an
interest rate of 10 percent, with interest payable on a quarterly basis
beginning in March 1994. During November, 1994, the note was renewed for an
additional nine months until July 1995. In July 1995, the note was extended for
an additional 60 days. The note was paid in full on September 11, 1995. The
note was secured by the corporate guarantee and assets of CFO Services, Inc.,
and the personal guarantee of Mr. Guthrie.
(3) As of December 31, 1995, Messrs. Daugherty and Guthrie were each indebted
to the Company in the amount of $46,666. Each indebtedness is evidenced by a
promissory note payable to the order of the Company dated December 21, 1994, and
due May 10, 1998. Each note bears interest at the rate of 10 percent per annum.
Payments are to be made from 100 percent of the proceeds of the sale of natural
gas from two wells the Company drilled prior to December 31, 1994 for a joint
venture in which the individuals are participants. Each note is secured by a
pledge of a nine percent working interest in the two well joint venture program.
(4) As of May 13, 1996, the Company had made advances to Mr. Guthrie totaling
$11,267.
LEASE OBLIGATION OF THE COMPANY
The Company is the tenant in a building owned by a partnership in which
William S. Daugherty and Timothy F. Guthrie each own a 50 percent interest. The
rent is $2,600 per month, and the lease expires in July 1997.
ARIZONA DESERT MINERALS CO., INC.
In 1992, Arizona Desert Minerals Co., Inc. ("Arizona Desert"), a company
wholly-owned by John R. Bogert, a former officer and director of the Company,
and Joan N. Bogert, a former officer of the Company, agreed to provide the
Company with consulting services in the management of its affairs. The services
covered business administration, employee
23
and shareholder relations, finance, raising capital, marketing, and other areas
affecting the Company's business. Arizona Desert appointed its President, John
R. Bogert, to apportion part of his time to perform the above agreed upon
duties. Mr. Bogert was not restricted from performing similar services for
other companies. The agreement terminated March 31, 1994. The agreement
provided that the annual fee for Arizona Desert's services would be $70,000,
however $30,000 of the annual fee was accrued until the Company begins
generating revenues from gold mine operations. During 1995, Arizona Desert
received approximately $38,001 in management fees. In 1995, the Company paid to
Arizona Desert the sum of $7,686 ($5,000 in principal and $2,686 in interest) in
the form of 8,838 shares of the Common Stock at the market price of $0.875 per
share. As of May 13, 1996, the Company is indebted to Arizona Desert in the
amount of $4,333.33. Both Mr. and Mrs. Bogert retired from the Company in 1995.
CFO SERVICES, INC.
Since 1990, Timothy F. Guthrie has served as director, Secretary and
President of CFO Services, Inc. ("CFO"), a consulting firm that provides
temporary and interim Chief Financial Officer and Controller services to
companies and due diligence and investment monitoring services for various
investor groups. CFO has been retained by the Company to provide various
accounting and financial management services. As CFO's representative, Mr.
Guthrie has agreed to perform the agreed upon duties. CFO also performs similar
services for other companies. In addition, Mr. Guthrie became Secretary and
Chief Financial Officer of the Company in 1995. The agreement between the
Company and CFO is on a month to month basis and provides for the Company to pay
a minimum of $5,967 for services rendered by CFO. The Company also reimburses
CFO for all out of pocket expenses it incurs rendering services to the Company.
As of December 31, 1995, the Company and its subsidiaries were indebted to CFO
in the amount of $42,007. During 1995, CFO was paid a total of $78,215 in the
form of 98,237 shares of the Common Stock at the market price ranging between
$0.75 and $0.875 per share. As of December 31, 1995, CFO and Mr. Guthrie held
65,205 and 15,881 shares, respectively, of the Common Stock.
GUTHRIE YORK & COMPANY, INC.
On February 1, 1995, the Company entered into an agreement with Guthrie
York & Company, Inc. ("GYC"), whereby GYC will provide marketing, public
relations and investor relations services to the Company. Timothy F. Guthrie,
the Secretary and Chief Financial Officer of Daugherty Petroleum, Inc., and the
Secretary of the Company, is a principal in GYC. As of December 31, 1995, GYC
held 48,000 shares of the Common Stock and an option for 100,000 at the price of
$1.00.
24
INDEBTEDNESS OF THE COMPANY TO A SHAREHOLDER
The Company is indebted to Alaska Investments Ltd. in the amount of $75,000
for expenditures made on behalf of the Company for public relations services.
The Company has no obligation repay Alaska Investments Ltd. except out of
revenues generated from the Company's mining properties, if and when the mining
properties are ever put into production. Alaska Investments Ltd. is believed to
be the beneficial owner of 13.7 percent of the Common Stock of the Company.
Niagara Oil, Inc., a subsidiary of Daugherty Petroleum, Inc., is indebted
to Jayhead Investments, Inc., an affiliate of Alaska Investments Ltd. This
indebtedness is for $115,000, and bears interest at a rate of 10 percent
beginning April 1, 1995. Payment terms are based on quarterly payments of
interest only with the total principal and interest, if any, due in full June 1,
1996. This indebtedness is secured by the assets of Niagara Oil, Inc., as well
as the corporate guarantee of Daugherty Petroleum, Inc. As of May 13, 1996,
the aggregate indebtedness to the Company and to any other person which is the
subject of a guarantee, support agreement, letter of credit or other similar
arrangement or understanding provided by the Company of all present and former
directors, officers and employees of the Company was $140,574.
LARGEST AMOUNT
NAME AND INVOLVEMENT OF OUTSTANDING DURING LAST AMOUNT OUTSTANDING
PRINCIPAL POSITION ISSUER OR SUBSIDIARY COMPLETED FISCAL YEAR AS OF MAY 13, 1996
------------------ -------------------- --------------------- ------------------
William S. Daugherty (1)(3) Lender $110,266 $105,974
President and Chief
Operating Officer
Timothy F. Guthrie (2)(3)(4) Lender $101,700 $34,600
Secretary and Chief
Financial Officer
Daugherty Petroleum, Inc.
- - --------------------
(1) Part of the indebtedness of Mr. Daugherty to the Company is evidenced by a
promissory note dated September 23, 1993 in the principal amount of $50,000.
The debt was incurred to assist Mr. Daugherty in the payment of his legal
expenses resulting from the acquisition by the Company of Daugherty Petroleum,
Inc. By the terms of the note, the unpaid principal bears interest at the rate
of six percent per annum and is repayable in monthly instalments of not less
than $1,000 per month. Repayment commenced in November 1993. As of December
31, 1995, the unpaid principal balance due on the note was $28,377.22. Any
unpaid balance is payable in full on December 31, 1997. The note is unsecured.
As of May 13, 1996, the unpaid principal balance of the note was $24,086.00.
Further, as of December 31, 1995 and May 13, 1996, Sentra Petroleum, Inc., a
company wholly-owned by Mr. Daugherty, was indebted to the Company's wholly-
owned subsidiary, Daugherty Petroleum, Inc, in the amount of $21,000 as a result
of a turnkey contract for one well drilled by Daugherty Petroleum, Inc. in the
Gausdale Field in Kentucky. As of December 31, 1995, a company wholly-owned by
Mr. Daugherty was indebted to Daugherty Petroleum in the amount of $17,556.
(2) During 1995, CFO Services, Inc., a company owned by Mr. Guthrie, was
indebted to the Company in the amount of $78,367. This indebtedness was
evidenced by a promissory note payable to the order of the Company bearing an
interest rate of 10 percent, with interest payable on a quarterly basis
beginning in March 1994. During November, 1994, the note was renewed for an
additional nine months until July 1995. In July 1995, the note was extended for
an additional 60 days. The note was paid in full on September 11, 1995. The
note was secured by the corporate guarantee and assets of CFO Services, Inc.,
and the personal guarantee of Mr. Guthrie.
(3) As of December 31, 1995, Messrs. Daugherty and Guthrie were each indebted
to the Company in the amount of $46,666. Each indebtedness is evidenced by a
promissory note payable to the order of the Company dated December 21, 1994, and
due May 10, 1998. Each note bears interest at the rate of 10 percent per annum.
Payments are to be made from 100 percent of the proceeds of the sale of natural
gas from two wells the Company drilled prior to December 31, 1994 for a joint
venture in which the individuals are participants. Each note is secured by a
pledge of a nine percent working interest in the two well joint venture program.
(4) As of May 13, 1996, the Company had made advances to Mr. Guthrie totaling
$11,267.
LEASE OBLIGATION OF THE COMPANY
The Company is the tenant in a building owned by a partnership in which
William S. Daugherty and Timothy F. Guthrie each own a 50 percent interest. The
rent is $2,600 per month, and the lease expires in July 1997.
ARIZONA DESERT MINERALS CO., INC.
In 1992, Arizona Desert Minerals Co., Inc. ("Arizona Desert"), a company
wholly-owned by John R. Bogert, a former officer and director of the Company,
and Joan N. Bogert, a former officer of the Company, agreed to provide the
Company with consulting services in the management of its affairs. The services
covered business administration, employee and shareholder relations, finance,
raising capital, marketing, and other areas affecting the Company's business.
Arizona Desert appointed its President, John R. Bogert, to apportion part of his
time to perform the above agreed upon duties. Mr. Bogert was not restricted
from performing similar services for other companies. The agreement terminated
March 31, 1994. The agreement provided that the annual fee for Arizona Desert's
services would be $70,000, however $30,000 of the annual
25
fee was accrued until the Company begins generating revenues from gold mine
operations. During 1995, Arizona Desert received approximately $38,001 in
management fees. In 1995, the Company paid to Arizona Desert the sum of $7,686
($5,000 in principal and $2,686 in interest) in the form of 8,838 shares of the
Common Stock at the market price of $0.875 per share. As of May 13, 1996, the
Company is indebted to Arizona Desert in the amount of $4,333.33. Both Mr. and
Mrs. Bogert retired from the Company in 1995.
CFO SERVICES, INC.
Since 1990, Timothy F. Guthrie has served as director, Secretary and
President of CFO Services, Inc. ("CFO"), a consulting firm that provides
temporary and interim Chief Financial Officer and Controller services to
companies and due diligence and investment monitoring services for various
investor groups. CFO has been retained by the Company to provide various
accounting and financial management services. As CFO's representative, Mr.
Guthrie has agreed to perform the agreed upon duties. CFO also performs similar
services for other companies. In addition, Mr. Guthrie became Secretary and
Chief Financial Officer of the Company in 1995. The agreement between the
Company and CFO is on a month to month basis and provides for the Company to pay
a minimum of $5,967 for services rendered by CFO. The Company also reimburses
CFO for all out of pocket expenses it incurs rendering services to the Company.
As of December 31, 1995, the Company and its subsidiaries were indebted to CFO
in the amount of $42,007. During 1995, CFO was paid a total of $78,215 in the
form of 98,237 shares of the Common Stock at the market price ranging between
$0.75 and $0.875 per share. As of December 31, 1995, CFO and Mr. Guthrie held
65,205 and 15,881 shares, respectively, of the Common Stock.
GUTHRIE YORK & COMPANY, INC.
On February 1, 1995, the Company entered into an agreement with Guthrie
York & Company, Inc. ("GYC"), whereby GYC will provide marketing, public
relations and investor relations services to the Company. Timothy F. Guthrie,
the Secretary and Chief Financial Officer of Daugherty Petroleum, Inc., and the
Secretary of the Company, is a principal in GYC. As of December 31, 1995, GYC
held 48,000 shares of the Common Stock and an option for 100,000 at the price of
$1.00.
INDEBTEDNESS OF THE COMPANY TO A SHAREHOLDER
The Company is indebted to Alaska Investments Ltd. in the amount of $75,000
for expenditures made on behalf of the Company for public relations services.
The Company has no obligation repay Alaska Investments Ltd. except out of
revenues generated from the Company's mining properties, if and when the mining
properties are ever put into production. Alaska Investments Ltd. is believed to
be the beneficial owner of 13.7 percent of the Common Stock of the Company.
Niagara Oil, Inc., a subsidiary of Daugherty Petroleum, Inc., is indebted
to Jayhead Investments, Inc., an affiliate of Alaska Investments Ltd. This
indebtedness is for $115,000, and bears interest at a rate of 10 percent
beginning April 1, 1995. Payment terms are based on quarterly payments of
interest only with the total principal and interest, if any, due in full June 1,
1996. This indebtedness is secured by the assets of Niagara Oil, Inc., as well
as the corporate guarantee of Daugherty Petroleum, Inc.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED WITH THIS REPORT.
PAGE
----
(1) Financial statements, Alaska Apollo Resources Inc. and subsidiary
companies--
Report of Kraft, Rothman, Berger, Grill, Schwartz & Cohen,
independent chartered accountants, dated May, 1996 . . . . . .32
Balance Sheet-December 31, 1995 . . . . . . . . . . . . . . . .33
Statement of Deficit for the year ended December 31, 1995 . . .35
Statement of Loss for the year ended December 31, 1995. . . . .36
Statement of Cash Flow for the year ended December 31, 1995 . .37
Notes to financial statements . . . . . . . . . . . . . . . . .38
26
ALL SCHEDULES HAVE BEEN OMITTED SINCE THE INFORMATION REQUIRED TO BE
SUBMITTED HAS BEEN INCLUDED IN THE FINANCIAL STATEMENTS OR NOTES OR HAS BEEN
OMITTED AS NOT APPLICABLE OR NOT REQUIRED.
(2) Exhibits--
The exhibits indicated by an asterisk (*) are incorporated by
reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3(a)* Memorandum and Articles for Catalina Energy & Resources Ltd., a
British Columbia corporation, dated January 31, 1979, filed as an
exhibit to Form 10 Registration Statement filed May 25, 1984.
File No. 0-12185.
3(b)* Certificate for Catalina Energy & Resources Ltd., a British
Columbia corporation, dated November 27, 1981, changing the name
of Catalina Energy & Resources Ltd. to Alaska Apollo Gold Mines
Ltd., and further changing the authorized capital of the Company
from 5,000,000 shares of common stock, without par value per
share, to 20,000,000 shares of common stock, without par value
per share, filed as an exhibit to Form 10 Registration Statement
filed May 25, 1984. File No. 0-12185.
3(c)* Certificate of Change of Name for Alaska Apollo Gold Mines Ltd.,
a British Columbia corporation, dated October 14, 1992, changing
the name of Alaska Apollo Gold Mines Ltd. to Alaska Apollo
Resources Inc., and further changing the authorized capital of
the Company from 20,000,000 shares of common stock, without par
value per share, to 6,000,000 shares of common stock, without par
value per share.
3(d)* Altered Memorandum of Alaska Apollo Resources Inc., a British
Columbia corporation, dated September 9, 1994, changing the
authorized capital of the Company from 6,000,000 shares of common
stock, without par value per share, to 20,000,000 shares of
common stock, without par value per share.
4* See Exhibit No. 3(a).
9* Voting Trust Agreements. Exhibits 3, 10 and 13 to Form 8-K for
the Company dated March 6, 1994. File No. 0-12185.
10(a)* Letter of Intent dated May 8, 1992 between Alaska Apollo Gold
Mines Limited and the Alaska Syndicate. Exhibit 10(f) to Form
10-K for the Company for the fiscal year ended December 31, 1992.
File No. 0-12185.
10(b)* Letter of Intent between Daugherty Petroleum, Inc. and Michigan
Southern Energy Corporation dated March 31, 1994 described in
Exhibit 10(b) to Form 10-K for the Company for the fiscal year
ended December 31, 1993. (File No. 0-12185).
10(c)* Redevelopment Agreement between the Company and Summit Funding,
Inc. dated July 1993 described in Exhibit 10(c) to Form 10-K for
the Company for the fiscal year ended December 31, 1993. (File
No. 0-12185).
10(d)* Agreement dated December 22, 1993 by and between Daugherty
Petroleum, Inc. and Wentzloff Energy, Inc. with respect to the
purchase by Daugherty Petroleum, Inc. of 6.5 billion cubic feet
of natural gas or its equivalent from 29 Kentucky partnerships
produced since April 1, 1993. Exhibit "1" to Form 8-K for the
Company dated March 6, 1994. File No. 0-12185.
27
10(e)* Trust Agreement dated December 22, 1993 by and between the
various partnerships described in Exhibit "1" to Form 8-K for the
Company dated March 6, 1994 (File No. 0-12185) and Breeding,
McIntyre & Cunningham, P.S.C. with respect to the 1,086,108
shares of the Common Stock of the Company received by the
partnerships in consideration of the sale and purchase described
in Exhibit "1" attached thereto.
10(f)* Voting Trust Agreement dated December 22, 1993 by and between
Wentzloff Energy, Inc. and the various partnerships described in
Exhibit "1" to Form 8-K for the Company dated March 6, 1994 (File
No. 0-12185) and Breeding, McIntyre & Cunningham, P.S.C. with
respect to the 1,086,108 shares of the Common Stock of the
Company received by the partnerships in consideration of the sale
and purchase described in Exhibit "1" attached thereto.
10(g)* Gas Purchase and Sale Agreement dated December 22, 1993 by and
between the various partnerships described in Exhibit "1" to Form
8-K for the Company dated March 6, 1994 (File No. 0-12185) and
Daugherty Petroleum, Inc. with respect to the production of gas
resulting from the sale and purchase of gas pursuant to the sale
and purchase described in Exhibit "1" attached thereto.
10(h)* Proxy dated December 22, 1993 by and between Wentzloff Energy,
Inc. and the various partnerships described in Exhibit "1" to
Form 8-K for the Company dated March 6, 1994 (File No. 0-12185)
in favor of Breeding, McIntyre & Cunningham, P.S.C. with respect
to the voting of the 1,086,108 shares of the Common Stock of the
Company received by the partnerships in consideration of the sale
and purchase described in Exhibit "1" attached thereto.
10(i)* Agreement for Purchase and Sale dated as of September 24, 1993 by
and between Wentzloff Energy, Inc. and Daugherty Petroleum, Inc.
with respect to the purchase and sale of the of 6.5 billion cubic
feet of natural gas or its equivalent from 29 Kentucky
partnerships produced since April 1, 1993 as described in Exhibit
"1" to Form 8-K for the Company dated March 6, 1994 (File
No. 0-12185), as well as the purchase by Daugherty Petroleum,
Inc. of undivided working interests in oil and gas leases and
certain equipment, machinery and personal property with respect
to such leases from Wentzloff Energy, Inc.
10(j)* Agreement and Amendment to Agreement dated November 16, 1993 by
and between Daugherty Petroleum, Inc., Wentzloff Energy, Inc. and
Wentzloff Partners, Inc. with respect to the amendment of the
agreement described in Exhibit "6" to Form 8-K for the Company
dated March 6, 1994 (File No. 0-12185), and the recasting of the
agreement in its current form.
10(k)* Agreement and Amendment to Agreement dated November 16, 1993 by
and between Daugherty Petroleum, Inc., Wentzloff Energy, Inc. and
Southern Drilling Co., Inc. with respect to the amendment of the
agreement described in Exhibit "6" to Form 8-K for the Company
dated March 6, 1994 (File No. 0-12185), and the recasting of the
agreement in its current form.
10(l)* Escrow Agreement dated November 15, 1993 by and between Wentzloff
Energy, Inc., Daugherty Petroleum, Inc., Inc., Alaska Apollo
Resources Inc., and Breeding, McIntyre & Cunningham, P.S.C. with
respect to the 60,000 shares of the Common Stock of the Company
received by Wentzloff Energy, Inc. in consideration of the sale
and purchase described in Exhibit "6" to Form 8-K for the Company
dated March 6, 1994. (File No. 0-12185).
10(m)* Voting Trust Agreement dated November 16, 1993 by and between
Wentzloff Energy, Inc. and Breeding, McIntyre & Cunningham,
P.S.C. with respect to the 60,000 shares of the Common Stock of
the Company received by Wentzloff Energy, Inc. in consideration
of the sale and purchase described in Exhibit "6" to Form 8-K for
the Company dated March 6, 1994. (File No. 0-12185).
10(n)* Proxy executed by Wentzloff Energy, Inc. covering the 60,000
shares of the Common Stock of the Company received by Wentzloff
Energy, Inc. in consideration of the sale and purchase described
in Exhibit "6" to Form 8-K for the Company dated March 6, 1994.
(File No. 0-12185).
28
10(o)* Escrow Agreement dated November 15, 1993 by and between Southern
Drilling Co., Inc., Daugherty Petroleum, Inc., Alaska Apollo
Resources Inc., and Breeding, McIntyre & Cunningham, P.S.C. with
respect to the 20,000 shares of the Common Stock of the Company
received by Southern Drilling Co., Inc. in consideration of the
sale and purchase described in Exhibit "6" to Form 8-K for the
Company dated March 6, 1994. (File No. 0-12185).
10(p)* Voting Trust Agreement dated November 16, 1993 by and between
Southern Drilling Co., Inc. and Breeding, McIntyre & Cunningham,
P.S.C. with respect to the 20,000 shares of the Common Stock of
the Company received by Southern Drilling Co., Inc. in
consideration of the sale and purchase described in Exhibit "6"
to Form 8-K for the Company dated March 6, 1994. (File No. 0-
12185).
10(q)* Proxy executed by Southern Drilling Co., Inc. covering the 20,000
shares of the Common Stock of the Company received by Southern
Drilling Co., Inc. in consideration of the sale and purchase
described in Exhibit "6" to Form 8-K for the Company dated March
6, 1994. (File No. 0-12185).
10(r)* Stock Purchase Agreement by and between William S. Daugherty,
Alaska Apollo Resources, Inc. and Daugherty Petroleum, Inc. dated
July 20, 1993. Reference is made to Form 8-K, dated November 11,
1993, filed with the Securities and Exchange Commission on
November 12, 1993. (File No. 0-12185).
10(s)* Subscription Agreement dated July 30, 1992 between Alaska Apollo
Gold Mines Ltd. and Alaska Investments Ltd. described in Exhibit
10(g) to Form 20-F for the Company for the fiscal year ended
December 31, 1993. (File No. 0-12185).
10(t)* Letter of Intent dated March 15, 1993 between Alaska Apollo
Resources Inc. and Daugherty Petroleum, Inc. described in Exhibit
10(h) to Form 20-F for the Company for the fiscal year ended
December 31, 1993. (File No. 0-12185).
10(u)* Director's Incentive Stock Option Agreement dated January 10,
1994 between the Company and John R. Bogert.
10(v)* Director's Incentive Stock Option Agreement dated January 10,
1994 between the Company and William S. Daugherty.
10(w)* Director's Incentive Stock Option Agreement dated January 10,
1994 between the Company and James K. Klyman-Mowczan.
10(x)* Director's Incentive Stock Option Agreement dated January 10,
1994 between the Company and Colin R. Bowdidge.
21 Subsidiaries of the Company:
- Niagara Oil, Inc., a Kentucky corporation.
- Daugherty Petroleum, Inc., a Kentucky corporation.
23(a)* Consent of Richard M. Russell & Associates, Inc. described in
Exhibit 23(a) to Form 10-K for the Company for the fiscal year
ended December 31, 1993. (File No. 0-12185).
23(b) Consent of Kraft, Rothman, Berger, Grill, Schwartz & Cohen.
23(c) Consent of Edward O. Strandberg, Jr., P.E.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K for the Company dated November 11, 1993,
File No. 0-12185, reporting the acquisition of Daugherty Petroleum,
Inc. (Item 2. Acquisition or Disposition of Assets.)
29
(2) Current Report on Form 8-K/A for the Company dated November 30, 1993,
File No. 0-12185, with respect to Financial Statements and Stock
Purchase Agreement pertaining to the acquisition of Daugherty
Petroleum, Inc. (Item 7. Financial Statements and Exhibits.)
(3) Current Report on Form 8-K for the Company dated March 6, 1994, File
No. 0-12185, reported the acquisition by the Company of 6.5 billion
cubic feet of gas or its equivalent from 29 Kentucky partnerships, as
well as 6,500 acres of oil and gas leases and various undivided
working interests in oil and gas leases and equipment and machinery.
The required financial statements and pro forma financial information
were not filed at the time the report was filed. Instead, the
financial statements and pro forma financial information were to be
filed by March 31, 1994. (Item 2. Acquisition or Disposition of
Assets.)
(4) Current Report on Form 8-K for the Company dated March 24, 1994, File
No. 0-12185, reported the resignation of Milton Klyman as a director
of the Company on March 24, 1994. (Item 5. Other Events.)
(5) Current Report on Form 8-K/A, Amendment No. 1, for the Company dated
March 31, 1994, File No. 0-12185, advising that the required financial
statements and pro forma financial information with respect to the
Form 8-K dated March 6, 1994 would be filed by April 15, 1994. (Item
7. Financial Statements and Exhibits.)
(6) Current Report on Form 8-K/A, Amendment No. 2, for the Company dated
April 14, 1994, File No. 0-12185, advising that the required financial
statements and pro forma financial information with respect to the
Form 8-K dated March 6, 1994 would be filed by April 29, 1994. (Item
7. Financial Statements and Exhibits.)
(7) Current Report on Form 8-K/A, Amendment No. 3, for the Company dated
May 6, 1994, File No. 0-12185, filing the required financial
statements and pro forma financial information with respect to the
Form 8-K dated March 6, 1994. (Item 7. Financial Statements and
Exhibits.)
(8) Current Report on Form 8-K for the Company dated August 24, 1995,
File No. 0-12185, reported the filing of a lawsuit by J. Rudolph
Oliver. (Item 5. Other Events)
(c) FINANCIAL STATEMENT SCHEDULES.
No schedules are required as all information required has been
presented in the audited financial statements.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALASKA APOLLO RESOURCES INC.
By /s/ William S. Daugherty
----------------------------------------
William S. Daugherty, Chairman of the Board
May 23, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William S. Daugherty Chairman of the Board and May 23, 1996
- - ------------------------------ President
William S. Daugherty
/s/ Charles L. Cotterell Director May 23, 1996
- - ------------------------------
Charles L. Cotterell
/s/ James K. Klyman-Mowczan Director May 23, 1996
- - ------------------------------
James K. Klyman-Mowczan
/s/ Timothy F. Guthrie Secretary and May 23, 1996
- - ------------------------------ Chief Financial officer
Timothy F. Guthrie
31
PAGE I
AUDITORS' REPORT
To The Shareholders Of
ALASKA APOLLO RESOURCES INC.
We have audited the consolidated balance sheets of ALASKA APOLLO RESOURCES INC.
as at December 31, 1995 and 1994 and the consolidated statements of deficit,
loss and cash flow for the three years ended December 31, 1995. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1995
and 1994 and the results of its operations and cash flow for the three years
ended December 31, 1995 in accordance with generally accepted accounting
principles in Canada.
/s/ Kraft, Rothman, Berger, Grill, Schwartz & Cohen
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
May 6, 1996
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA-UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as those described in
Note 1(b) to the consolidated financial statements relating to the company's
ability to recover mineral property costs incurred in connection with resource
property exploration activities. Our report to the shareholders dated May 6,
1996, is expressed in accordance with Canadian reporting standards which do not
permit a reference to such uncertainties in the auditor's report when the
uncertainties are adequately disclosed in the financial statements.
/s/ Kraft, Rothman, Berger, Grill, Schwartz & Cohen
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
May 6, 1996
32
PAGE II
ALASKA APOLLO RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1995
ASSETS
1995 1994
------------ ------------
CURRENT
Cash $ 138,980 $ 369,447
Accounts receivable 509,943 791,432
Inventories 80,890 -
Prepaid expense 11,421 11,162
Other receivable 75,904 -
Notes receivable (Note 5) 214,000 169,632
------------ ------------
1,031,138 1,341,673
BONDS AND DEPOSITS 43,419 41,919
MINING PROPERTY AND RELATED EXPENDITURES (Note 2) 11,211,462 11,158,581
OIL AND GAS PROPERTIES - net (Note 3) 4,057,908 4,222,175
CAPITAL (Note 4) 387,783 297,292
NOTES RECEIVABLE (Note 5) 84,376 56,000
LOAN RECEIVABLE (Note 6) 17,556 17,536
GOODWILL (net of accumulated
amortization $402,651; 1994 - $223,695) 1,386,913 1,565,869
------------ ------------
------------ ------------
$ 18,220,555 $ 18,701,045
------------ ------------
------------ ------------
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
\S\Charles L. Cotterell \S\William S. Daugherty
----------------------------------- -----------------------------------
Director Director
33
PAGE III
ALASKA APOLLO RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1995
LIABILITIES
1995 1994
------------ ------------
CURRENT
Bank loans (Note 7) $ 154,207 $ 10,000
Accounts payable 805,618 426,068
Accrued liabilities 545,455 588,091
Long-term debt (Note 8) 218,458 86,340
Loans payable (Note 9) - 5,000
------------ ------------
1,723,738 1,115,499
LONG-TERM DEBT (Note 8) 913,986 849,025
DEFERRED INCOME TAXES 8,891 6,325
------------ ------------
2,646,615 1,970,849
------------ ------------
SHAREHOLDER'S EQUITY
CAPITAL STOCK (Note 10)
AUTHORIZED
20,000,000 Common shares
ISSUED
7,742,710 Common shares (1994 - 7,382,580) 20,068,190 19,784,443
DEFICIT ( 4,494,250) ( 3,054,247)
------------ ------------
15,573,940 16,730,196
------------ ------------
$ 18,220,555 $ 18,701,045
------------ ------------
------------ ------------
See accompanying notes to financial statements.
34
PAGE IV
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF DEFICIT
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
1995 1994 1993
---------- ---------- ----------
DEFICIT, beginning of year $(3,054,247) $(2,858,220) $(2,607,194)
Adjustment of prior years'
income taxes - ( 21,204) -
---------- ---------- ----------
(3,054,247) (2,879,424) (2,607,194)
Net loss for the year (1,440,003) ( 174,823) ( 251,026)
---------- ---------- ----------
DEFICIT, end of year $(4,494,250) $(3,054,247) $(2,858,220)
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
35
PAGE V
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF LOSS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
1995 1994 1993
---------- ---------- ----------
GROSS REVENUE $ 2,052,222 $ 2,458,835 $ 129,911
DIRECT EXPENSES 1,660,043 1,302,187 71,838
---------- ---------- ----------
392,179 1,156,648 58,073
---------- ---------- ----------
GENERAL AND ADMINISTRATIVE COSTS
Salaries 288,701 188,855 33,832
Consulting and management fees 196,563 237,917 61,431
Legal fees 188,411 176,924 50,740
Amortization - goodwill 178,956 178,956 44,764
- capital assets 53,982 28,643 1,007
- oil and gas equipment 8,660 8,415 2,042
Depletion - oil and gas properties 155,607 85,208 9,705
Office and general 141,608 104,078 65,381
Bad debts 137,632 33,759 -
Audit and accounting 128,737 124,044 -
Shareholders' information 117,930 26,556 36,882
Advertising and promotion 98,354 165,978 -
Occupancy costs 70,946 46,951 -
Interest on long-term debt 51,814 28,534 7,720
Insurance 41,716 25,560 -
Trust and stock exchange company fees 22,632 8,162 29,662
Engineering 18,241 23,590 -
Repairs and maintenance 11,344 19,166 -
Loss on sale of equipment - - 2,557
---------- ---------- ----------
1,911,834 1,511,296 345,723
---------- ---------- ----------
Less: Miscellaneous 78,129 28,212 -
Litigation settlement - ( 7,500) -
Interest and other income 4,089 15,062 15,024
---------- ---------- ----------
82,218 35,774 15,024
---------- ---------- ----------
1,829,616 1,475,522 330,699
---------- ---------- ----------
LOSS BEFORE INCOME TAXES (1,437,437) ( 173,335) ( 258,861)
---------- ---------- ----------
Current income taxes - 111,310 -
Utilization of non-capital
loss carry-forward - ( 111,310) ( 7,835)
---------- ---------- ----------
- - ( 7,835)
Deferred income taxes 2,566 1,488 -
---------- ---------- ----------
2,566 1,488 ( 7,835)
---------- ---------- ----------
NET LOSS FOR THE YEAR $(1,440,003) $( 174,823) $( 251,026)
---------- ---------- ----------
---------- ---------- ----------
NET LOSS PER SHARE (Note 11) $(0.19) $(0.03) $(0.06)
------ ------ ------
------ ------ ------
See accompanying notes to financial statements.
36
PAGE VI
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
1995 1994 1993
---------- ---------- ----------
OPERATING ACTIVITIES
Net loss for the year $(1,440,003) $( 174,823) $( 251,026)
Amortization and depletion 397,205 301,197 57,518
Deferred income taxes 2,566 1,488 4,837
Decrease in incorporation cost - 1,525 -
(Increase) decrease in
unearned income - ( 40,500) 40,500
(Increase) decrease in
prepaid expenses ( 259) 38,645 ( 43,610)
(Increase) decrease in
accounts receivable 281,489 ( 679,295) ( 112,137)
Inventories ( 80,890) - -
Prior period adjustment - ( 21,204) -
Other receivable ( 75,904) - -
Increase in bonds and deposits ( 1,500) ( 41,919) -
Increase in accounts payable 379,550 403,976 22,093
Increase (decrease) in
accrued liabilities ( 42,636) 384,148 159,824
---------- ---------- ----------
( 580,382) 173,238 ( 122,001)
---------- ---------- ----------
FINANCING ACTIVITIES
Increase in loans receivable ( 20) ( 17,536) -
Increase in notes receivable ( 72,744) ( 177,632) ( 48,000)
Issue of capital stock 283,747 3,589,052 3,089,132
Increase of long-term debt 197,079 186,553 81,994
Repayment of loan payable ( 5,000) ( 10,000) ( 34,700)
---------- ---------- ----------
403,062 3,570,437 3,088,426
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of capital assets ( 144,473) ( 197,346) -
Acquisition of oil and
gas properties - (3,522,631) ( 934,510)
Goodwill - - (1,789,564)
Expenditures on mining
property (net) ( 52,881) ( 61,111) ( 10,161)
---------- ---------- ----------
( 197,354) (3,781,088) (2,734,235)
---------- ---------- ----------
CHANGE IN CASH AND BANK LOANS ( 374,674) ( 37,413) 232,190
CASH AND BANK LOANS, beginning of year 359,447 396,860 164,670
---------- ---------- ----------
CASH AND BANK LOANS, end of year $( 15,227) $ 359,447 $ 396,860
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE
Interest paid during the year $ 50,123 $ 28,221 $ 13,180
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
37
PAGE VII
ALASKA APOLLO RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which, except as
described in Note 14 conform in all material respects with accounting
principles generally accepted in the United States.
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
company and its wholly-owned subsidiary. All material inter-company
accounts and transactions have been eliminated on consolidation.
(b) INVENTORIES
Inventories are carried at the lower of cost and net realizable value.
(c) MINING PROPERTY AND RELATED EXPENDITURES
The company defers all costs relating to mining properties by project
area until such time as the properties are put into commercial
production, sold or abandoned. Costs deferred include acquisition
costs, exploration and development expenditures and cost of assets
permanently dedicated to exploration and development. Buildings,
equipment and machinery will not be amortized until the mine achieves
commercial production.
The ultimate realization of the deferred costs and expenditures is
dependent upon the discovery of commercially exploitable ore bodies,
at which time such costs and expenditures will be charged against
income using an appropriate method and rate to be determined.
When evaluation of a project area discloses possible impairment, the
deferred costs and expenditures thereon are written down to the
recoverable amount. Unsuccessful projects are written off when
abandoned.
(d) OIL AND GAS PROPERTIES
(i) ACCOUNTING TREATMENT FOR COSTS INCURRED
The company uses the successful efforts method of accounting for
oil and gas producing activities. Costs to acquire mineral
interest in oil and gas properties, to drill and equip
exploratory wells that find proved reserves, and to drill and
equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, geological
and geophysical costs, and costs of carrying and retaining
unproved properties are expensed.
38
PAGE VIII
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) OIL AND GAS PROPERTIES (Continued)
(i) ACCOUNTING TREATMENT FOR COSTS INCURRED (continued)
Unproved oil and gas properties that are individually significant
are periodically assessed for impairment of value and a loss is
recognized at the time of impairment by providing an impairment
allowance. Other unproved properties are amortized based on the
company's experience of successful drilling and average holding
period.
Capitalized costs of producing oil and gas properties, after
considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the
unit-of-production method. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved
property, the cost and related accumulated depreciation,
depletion and amortization are eliminated from the property
accounts and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost
is charged to accumulated depreciation, depletion and
amortization with a resulting gain or loss recognized in income.
On the sale of an entire interest in a unproved property for cash
or cash equivalent, gain or loss on the sale is recognized taking
into consideration the amount of any recorded impairment if the
property had been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated
as a reduction of the cost of the interest retained.
(ii) REVENUE AND EXPENSE RECOGNITION
Revenue on turnkey drilling contracts is recognized upon securing
binding contracts. Budgeted expenses are recognized at the same
time as revenue from turnkey operations. Oil and gas revenue is
recognized when sold. All income and expense items are
recognized pursuant to the accrual method of accounting.
(iii) WELLS AND RELATED EQUIPMENT
Wells and related equipment are recorded at cost. All items are
amortized on the straight-line method over the estimated useful
life of the asset being seven years.
(e) GOODWILL
Goodwill is recorded at cost and is being amortized over 10 years on a
straight-line basis. The goodwill arose on the issuance of the
company's shares.
39
PAGE IX
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) CAPITAL ASSETS
Capital assets are stated at cost. Amortization is being provided for
on a straight-line basis over the useful life of the asset ranging
from five to thirty-one years.
2. MINING PROPERTY AND RELATED EXPENDITURES
UNGA ISLAND
ALASKA MINERAL DEFERRED BUILDING
PROPERTY EXPENDITURES EQUIPMENT
COSTS (SEE BELOW) AND MACHINERY TOTAL
----------- ----------- ----------- -----------
Balance, December 31, 1993 $ 1,010,000 $ 9,310,414 $ 777,061 $ 11,097,475
1994 additions - 61,106 - 61,106
----------- ----------- ----------- -----------
Balance, December 31, 1994 1,010,000 9,371,520 777,061 11,158,581
1995 additions - 52,881 - 52,881
----------- ----------- ----------- -----------
Balance, December 31, 1995 $ 1,010,000 $ 9,424,401 $ 777,061 $ 11,211,462
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
(a) Deferred expenditures on the Unga Island resource property consist of
the following:
1995 1994
-------- --------
Geological consulting $ 50,755 $ 34,277
Miscellaneous 27,126 23,033
Assaying and engineering - 3,796
-------- --------
77,881 61,106
Proceeds on conveying mining rights (b) ( 25,000) -
-------- --------
$ 52,881 $ 61,106
-------- --------
-------- --------
(b) The company signed a letter of intent, on February 24, 1995, whereby
the company granted an option to further explore and commercially
develop the company's gold and silver reserves located in Alaska.
Under the terms of the letter of intent, the optionee, Addwest Mineral
Inc. ("Addwest"), has the option to either merge their precious metals
interest into a jointly owned, publicly traded company or to form a
joint venture. With a joint venture agreement, the company would be
required to contribute its Alaskan properties and would receive
twenty-five percent of the operating proceeds. The option expired on
December 31, 1995.
40
PAGE X
3. OIL AND GAS PROPERTIES
1995 1994
---------------------------------------- -----------
ACCUMULATED
COST AMORTIZATION NET NET
---------- ------------ --- ---
Proved properties $ 4,181,042 $ 173,760 $ 4,007,282 $ 4,056,462
Unproved properties 5,130 - 5,130 111,557
Wells and related equipment 64,614 19,118 45,496 54,156
---------- ---------- ---------- ----------
$ 4,250,786 $ 192,878 $ 4,057,908 $ 4,222,175
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
4. CAPITAL ASSETS
1995 1994
---------------------------------------- -----------
ACCUMULATED
COST AMORTIZATION NET NET
---------- ------------ --- ---
Land $ 12,908 $ - $ 12,908 $ 12,908
Buildings 168,959 14,653 154,306 155,785
Machinery and equipment 80,805 16,100 64,705 30,260
Office furniture, fixtures
and equipment 70,214 18,062 52,152 31,710
Vehicles 159,568 55,856 103,712 66,629
---------- ---------- ---------- ----------
$ 492,454 $ 104,671 $ 387,783 $ 297,292
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
5. NOTES RECEIVABLE
Notes receivable are comprised as follows.
1995 1994
---------- ----------
Receivable from a non-related company, bearing interest at 8.75%
per annum, payable on demand, of the total $200,000 notes
receivable, $130,000 is secured by equipment and $70,000 is secured
by a priorty lien on land, buildings and equipment. These loans are
convertible into equity upon confirmation of the plan of reorgani-
zation (Note 16). $ 200,000 $ -
Receivable from a director and senior officers, bears interest at
10% per annum, is secured by an assignment of title in certain oil
and gas working interests and is repayable over a three-year
period ending May 10, 1998 70,000 70,000
Receivable from a director of the company, bears interest at 6%
per annum and is repayable at $1,000 per month 28,376 38,348
---------- ---------
Carried forward........... $ 298,376 $ 108,348
---------- ---------
41
PAGE XI
5. NOTES RECEIVABLE (Continued)
1995 1994
-------- --------
Brought forward............ $ 298,376 $ 108,348
Receivable from a company owned by a senior officer of the company,
bears interest at 10% per annum, is secured by the assets and personal
guarantee of the borrower and is due July 31, 1995 - 78,367
Receivable from a non-related company, bears interest at 8% per annum
and is unsecured - 33,417
Receivable from a senior officer of the company, non-interest bearing
and is unsecured - 5,500
-------- --------
298,376 225,632
Less: Current portion 214,000 169,632
-------- --------
$ 84,376 $ 56,000
-------- --------
-------- --------
6. LOAN RECEIVABLE
This loan receivable from a company owned by a director of this company is
non-interest bearing with no specific terms of repayment. The company does
not intend to demand repayment within the next twelve months.
7. BANK LOANS
The bank loans bear interest at 9.8% and 9.75% per annum, payable semi-
annually, and mature March 23, 1996 and May 4, 1996. One of the loans is
secured by a certain capital asset. Subsequent to the year-end, the loans
were renewed and or refinanced by another financial institution with
similar terms and conditions.
On December 7, 1995, the company's subsidiary established a line of credit
with a bank in the amount of $100,000. This facility bears interest at
prime plus 2% per annum, interest only payable monthly, and is due on
December 31, 1996. This loan is collateralized by the subsidiary's
accounts receivable and is guaranteed by the company. As at December 31,
1995, the balance of this loan was $105,207, including accrued interest.
42
PAGE XII
8. LONG-TERM DEBT
On July 8, 1986, the company purchased the mineral property on Unga Island,
Alaska for debt in the amount of $854,818. The debt is non-interest
bearing, payable at $2,000 per month until fully paid, and is secured by
deeds of trust over the Unga Island mineral claims and certain buildings
and equipment located thereon.
The purchase agreement also provides for the payment of monthly royalties
at 4% of net smelter returns or net revenue, as defined in the agreement.
Any royalties paid reduce the amount of the purchase price payable above.
The obligation is stated at its remaining face value of $594,818 and has
not been discounted.
1995 1994
-------- --------
Note payable as outlined above $ 594,818 $ 618,818
Loans payable bearing interest at rates ranging from 6.27% to 12.5% per
annum, maturing at various dates up to and including June 25, 2003.
The loans payable are secured by specific equipment. 352,581 124,077
Loan payable to a non-affiliated company, collateralized by the assets
and the corporate guarantee of a wholly-owned subsidiary, bearing
interest at 10% per annum with quarterly payments of interest only
beginning April 1, 1995. Principal and accrued interest, if any, due in
full July 1, 1996. 115,000 115,000
Mortgage payable, secured by real estate, bearing interest at 9.25%
per annum, payable in monthly instalments of $1,256 70,045 77,470
-------- --------
1,132,444 935,365
Less: Current portion 218,458 86,340
-------- --------
$ 913,986 $ 849,025
-------- --------
-------- --------
Principal repayments for the next five years are as follows:
1996 $ 218,458
1997 219,034
1998 79,402
1999 69,859
2000 48,628
43
PAGE XIII
9. LOANS PAYABLE
The loans payable to a company controlled by a senior officer bear interest
at 12% per annum and are unsecured.
Interest of $2,689 (1994 - $600; 1993 - $3,450) has been charged on the
loans.
10. CAPITAL STOCK
(a) COMMON SHARES ISSUED
SHARES AMOUNT
----------- ----------
Balance, December 31, 1993 5,829,498 16,195,391
Issued on acquisition of oil and gas properties (i) and (ii) 1,410,574 3,466,142
Issued for settlement of debt 142,508 122,910
----------- -----------
Balance, December 31, 1994 7,382,580 19,784,443
Issued for settlement of debt 360,130 283,747
----------- -----------
Balance, December 31, 1995 7,742,710 $ 20,068,190
----------- -----------
----------- -----------
(i) WENTZLOFF ENERGY, INC.
On February 18, 1994, the company acquired
6.5 billion cubic feet (BCF) of natural gas
or its equivalent in exchange for the issuance
of 1,235,572 common shares 1,235,572 $ 3,258,327
(ii) MITUCKY PARTNERSHIPS
In June 1994, the company acquired 600 million
cubic feet of natural gas or its equivalent in
exchange for the issuance of 175,002 common shares 175,002 207,815
----------- -----------
1,410,574 $ 3,466,142
----------- -----------
----------- -----------
(b) Stock options have been granted and approved by the shareholders of
the company to purchase common shares of the company as follows:
(i) to directors of the company, an aggregate of 330,000 common
shares at $1.00 per share exercisable up to and including
December 10, 1998.
44
PAGE XIV
10. CAPITAL STOCK (Continued)
(b) (Continued)
(ii) Subsequent to the year-end, additional options were granted to a
director and senior officers of the company for an aggregate of
400,000 common shares at an exercise price of $1.00 per share.
These options become vested and exercisable during certain five
year periods up to and including February 27, 2003.
(iii) to a director of the company, an aggregate of 100,000 common
shares at $1.00 per share, exercisable up to and including
January 31, 1997.
No options have been exercised as of the date of the report.
(c) In prior years, warrants have been granted and approved by the
shareholders of the company to a non-related party to purchase 6,667
shares exercisable at $3.93 per share up to and including March 31,
1998. During the year, the board of directors of the company approved
the issuance of warrants to a non-related party to purchase 500,000
shares at $0.50, subject to further adjustment, exercisable up to and
including October 30, 2000.
(d) During the year, the board of directors of the company approved the
issuance of shares and or stock options to purchase common shares of
the company as follows:
- to issue 125,000 shares to the president and key employees of the
company as bonuses;
- to senior officers of the company, an aggregate of 300,000 common
shares at $1.00 per share. These options are vested and
exercisable at the rate of 75,000 shares per year. The first
block of 75,000 shares is exercisable immediately and expires
five years thereafter.
- to the president of the company, 200,000 shares at $1.00 per
share. These options are vested and exercisable at the rate of
50,000 shares per year and to expire five years thereafter.
- to directors of the company, an aggregate of 20,000 shares at
$1.00 per share, exercisable immediately and expire five years
thereafter.
No shares have been issued or options have been exercised as of the
date of the report.
11. LOSS PER SHARE
Loss per share is calculated using the weighted average number of shares
outstanding during the year. The weighted average of common shares was
7,605,669 (1994 - 6,763,539; 1993 - 4,128,265). Outstanding stock options
and warrants have no dilutive effect on the loss per share.
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12. RELATED PARTY TRANSACTIONS
(a) OFFICERS' REMUNERATION
The accounts of the company include consulting and management fees
paid or payable to officers and directors for the three years ended
December 31, 1995.
On April 7, 1989, the company entered into an agreement with Arizona
Desert Minerals (ADM), a company related to a director of this
company, whereby the company will pay ADM management fees of $60,000
annually, $12,000 of which is to be deferred until the company starts
to generate revenue from its mining operations. On May 8, 1992, the
agreement was amended and calls for an annual $30,000 deferral. This
agreement was terminated on November 15, 1995. As at December 31,
1995, the total deferral amount is $128,250. The management fees
deferred have not been recorded on the books of the company.
(b) SHAREHOLDER INFORMATION
During 1993, a shareholder expended, on behalf of the company,
shareholder information expenses in the amount of $75,000. The
company has recorded a reserve provision against payment of this
amount until the company's mining operations commence production.
(c) ACCOUNTS RECEIVABLE
Accounts receivable include $21,000 (1994 - $21,000) due from a
company owned by one of the directors.
(d) ACCOUNTS PAYABLE
Accounts payable include $50,689 (1994 - $23,000) payable to companies
owned by senior officers of the company.
(e) OCCUPANCY COSTS
Occupancy costs include rent of approximately $31,200 (1994 - $27,000)
paid to a company which is owned by a director and an officer of this
company.
(f) CONSULTING AND MANAGEMENT FEES
Consulting and mangeemnt fees are paid to companies owned by senior
officers of the company.
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13. SEGMENTED INFORMATION
MINING
EXPLORATION OIL AND
AND GAS 1995 1994
DEVELOPMENT DEVELOPMENT CORPORATE TOTAL TOTAL
---------- ---------- ---------- ---------- ----------
$ $ $ $ $
DECEMBER 31, 1995
Revenue (net) - 392,179 - 392,179 1,302,187
---------- ---------- ---------- ---------- ----------
General corporate expenses - - 1,380,597 1,380,597 1,145,766
Interest on long-term debt 51,814 - - 51,814 28,534
Amortization - equipment - 8,660 53,982 62,642 37,058
- goodwill - 178,956 - 178,956 178,956
Depletion - 155,607 - 155,607 85,208
---------- ---------- ---------- ---------- ----------
51,814 343,223 1,434,579 1,829,616 1,475,522
---------- ---------- ---------- ---------- ----------
Loss before income taxes (51,814) 48,956 (1,434,579) (1,437,437) (173,335)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Identifiable assets 11,211,462 5,444,821 1,564,272 18,220,555 18,701,045
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Capital expenditures 52,881 - 144,473 197,354 3,781,083
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
14. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES
Financial Accounting Standards No. 109 "Accounting for Income Taxes"
requires the use of an asset and liability approach for accounting for
income taxes. There would be no effect from the adoption of the statement,
nor would the results of operations be different than those reported under
Canadian GAAP. Under FAS 109, the company would have reported the
following deferred income tax asset at December 31, 1995.
Total deferred tax liabilities $ 3,378,713
Less: Valuation allowance 914,716
----------
2,463,997
Total deferred tax liabilities 2,413,570
----------
Net deferred tax assets $ 50,427
----------
----------
15. INCOME TAXES
As at December 31, 1995, the company had net operating loss carry-forwards
in the U.S. for income tax purposes of approximately $7,925,600 which
expire from 1996 to 2011.
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15. INCOME TAXES (Continued)
For Canadian federal income tax purposes, net operating loss carry-forwards
of approximately $1,029,000 expire at various dates through to 2002.
In addition, the company has approximately $75,000 of cumulative Canadian
exploration and development expenses and Canadian oil and gas property
expenses available to reduce future years' taxable income.
The potential benefit of the losses on earnings has not been reflected in
these consolidated financial statements.
16. COMMITMENTS
(a) In 1995, the company's wholly-owned subsidiary signed a letter of
intent to purchase a Kentucky based hardwood lumber manufacturing
facility that is currently operating under plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code. As part of this
acquisition, the subsidiary has provided various secured loans to that
company which have priority status over other creditors in this
reorganization. As of December 31, 1995, the subsidiary has financed
this acquisition with a series of loans totalling $200,000 (Note 5).
The subsidiary has commitments to borrow an additional $320,000 to
complete this transaction and as of December 31, 1995, it has received
firm commitments for these loans. As at December 31, 1995, these
consolidated financial statements include the following balances
related to this commitment.
Inventories $ 80,920
Other receivables 44,000
Note receivable 200,000
Accounts payable to the supplier of inventories 130,386
(b) The company is committed to issuing approximately 42,000 common shares
as additional consideration for the acquisition of natural gas from
Wentzloff Energy, Inc. (Note 3(i)).
17. SUBSEQUENT EVENTS
Subsequent to the year-end, the company's wholly-owned subsidiary entered
into the following transactions:
(a) on February 23, 1996, signed an agreement for the sale of its wholly-
owned subsidiary;
(b) effective March 1, 1996, acquired 100% of the working interest in a
total of thirty-five (35) wells in Hopkins County, Kentucky.
18. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform with
the current year's presentation.
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